If you are familiar with annuities, you’ve probably heard about what people have to say about them. Many people have mixed opinions about annuities, which can be expected. Annuities are like any other financial plan because they have advantages and disadvantages. Each person is affected by annuities in a different way, so it’s important that you understand how they can affect you before jumping to any conclusions about whether they’re inherently good or bad. And, luckily for you, a great place to start is with The Best Senior Services.
In this article, we are going to explain the pros and the cons about some of the available annuity plans, and how they could affect you.
What are annuities?
Annuities are best described as an amount of money that goes to you over a period of time. They are typically linked to life insurance policies, and they can be seen as the “savings accounts” within those policies. In fact, just about everywhere you look to learn more about annuities will tell you that it’s a contract between the annuitant (you) and the insurance company. And the websites/videos that tell you this are right: this is a way you should be thinking about it.
There are two types of annuities that we will be covering in this article today: fixed and variable. There are multiple types of annuities that exist, such as indexed, immediate, deferred and more, but for brevity’s sake, we will only be focusing on fixed and variable.
- Fixed: Fixed annuities are in play when your insurance company invests your funds and provides you with a payout in a fixed amount. This fixed amount is like a Certificate of Deposit (CD). Fixed annuities are also designed to protect you from losses. The reason why they are called “fixed” is because there are fixed rates of return that are based upon your interest rate. Your interest rate can be changed once you reach the end of your pre-determined period.
- Variable: Variable annuities are different from fixed annuities and need to be approached as such. First, you are able to decide how these funds are invested, rather than your insurance company. The returns you receive will depend upon the performance of the investments that you choose, so it can become a risky game. Variable annuities are also intended to fund your retirement, so as a result, these annuities should not be used for any short-term financial goals you or your loved ones may have.
Why people don’t like annuities
A lot of it comes down to the fact that people are misled about annuities, and don’t understand the full picture of them when they purchase a plan. And although we are only discussing fixed and variable annuities, there are other annuity plans people don’t recommend, like immediate annuities.
Are there any positives to annuities?
The short answer to this question is: Yes, of course! there are advantages to having an annuity plan, regardless of what you have. There are even benefits to variable annuities, the plan that you may be warned about the most.
Below are some of the advantages that come with fixed annuities:
- You have a strong return that is guaranteed to you. This is because the money you are investing will be accumulating. This is something your insurance agent/broker should be disclosing to you, so that you understand what you will be receiving out of this plan.
- Investment minimums are low. In order to fund a fixed annuity plan, you have to have to begin by investing a certain amount of money. Luckily, for a fixed annuity, it isn’t expensive to do so. You only need $1,000 to get started.
- The money earned will be tax-deferred. This can be both an advantage and disadvantage. Whatever is accumulating within your fixed annuity will not be taxed. However, if you decide to take out distributions of it, you will be taxed.
- You have the option to annuitize. Your fixed annuity can later be used to become a sort of retirement income for you and your spouse if that is the direction you would like it to go. Unfortunately, a lot of people are unaware of this deal, so it goes unused by many.
Below are some of the advantages that come with variable annuities:
- You have the ability to choose what you will be investing in. This one speaks for itself, so if you want more freedom over what your funds will be investing toward, this may seem like a major bonus.
- There is an unlimited number of contributions that can be put into your variable annuity. The same could not be said for other retirement accounts that may be suggested for you, so this is a really nice feature.
- Like a fixed annuity, the money earned will be tax-deferred. When your annuity is in its growing phase, you will not be taxed on it. That is, unless you begin to take out distributions. In that case, your rate could possibly be higher than other investment distributions. However, as long as you are not taking out distributions, you are able to re-assign that money within that fund. And you can do that without having to be taxed, too.
- There is an included death benefit. This benefit will go to your heirs. Whenever you pass away, your heirs will have two options for how they will want to receive the money. The first option is to be given the amount that you have previously paid into the annuity. The second option is to be paid what the annuity is valued at at the time of your passing.
How annuities can affect YOU
Those who collect annuities do it for a few reasons. A common reason is the fact that they want some form of guaranteed income for either the remainder of their lives or just a set amount of time. Another reason can include the fact that they simply just want a return on their investments. Each reason is valid as to why someone would be interested in an annuity.
However, it’s important that you understand the risks of annuities and how you and/or your loved ones can be affected by them. Annuities may seem glamorous, but you need to remember that these are products of insurance, meaning you won’t own anything that you’ve just purchased, unless you want to consider your contract as something. And when the money is returned to you, it means that you’re getting back what you’ve already paid them, so you’re not earning anything out of this. Not only that, but the amount that is returned is stretched out over a long period of time, so you have to wait throughout that period to receive your money back.
Below are some of the ways that fixed annuities can negatively impact you and/or your loved ones:
- There is a penalty for early withdrawals. This may not come as a surprise, because you will also receive penalty fees from taking early withdrawals from your 401(k) or IRA accounts. Similar to your IRA, if you pull from your fixed annuity account before you reach 59 ½, you will incur a 10% penalty fee.
- They are not insured by the FDIC. If a service is covered by the FDIC, then that means the depositor (in this case, you), is insured up to $250,000 in the event of bank failure. And, according to FDIC.gov, it “does not insure nondeposit investment products, even if they were purchased from an insured bank, including annuities, mutual funds, stocks, bonds, government securities, municipal securities, U.S. Treasury securities.” In addition, safe deposit boxes and robberies/other thefts are not insured by the FDIC.
- Limited liquidity. When you agree to a fixed annuity plan, you are agreeing that the funds will either be distributed over a certain number of payments, or a pre-determined deferral period. This circles back to the penalty of withdrawals, as it reiterates how important it is that you do not take out, or move around, money within these funds.
Below are some of the ways that variable annuities can negatively impact you and/or your loved ones:
- They are extremely expensive. In fact, they’re so expensive, that they are considered one of the most expensive financial products available. One of the first things to make it costly are the fees. These fees are mutual fund subaccount management fees, contract maintenance fees, and mortality and expense fees. These will basically replace the tax that you’re deferring, and that can quickly become burdensome for someone who wasn’t expecting it.
- Other investments are more liquid than variable annuities. If you decide that you no longer want to participate in your variable annuity, you better hope that at least seven years has passed.
- There is high risk associated. One of the benefits associated with variable annuities is that you are able to choose what you are investing in. However, because you are choosing where your investment funds are going, your returns are based on the investment portfolio’s success. Typically, people seek risks. But when it comes to your finances, it’s worth considering whether it would be better to be playing it safe. One way you can play it safe is by purchasing a rider who will maintain the gains you’ve earned after a certain date. Some even offer that you will get some sort of payment regardless of the portfolio’s success.
Annuities are a really complex service to grasp, so it’s not surprising to hear that many feel as though they weren’t given the full story when signing up for a plan. However, that doesn’t have to be the case. If you or a loved one is considering getting an annuity plan, you have every right to do so.
Make sure you understand what all is entailed within the annuity you are looking into. Like we disclosed: there are multiple different annuities that you can invest in, and we only covered a few of them in this article. Our advice is to talk with a licensed agent, or a financial specialist, about whether an annuity is the best plan for you.
At The Best Senior Services, we want to make sure that you are speaking with someone who prioritizes your financial needs. That’s why we dedicate ourselves to educating seniors about Medicare and other financial services. If you are interested in being connected with a local, licensed agent, visit our website or call us at 855.979.8277 today.