Are Annuities a Good or Bad Investment

Annuities have earned the position of being a stable investment option for an investor’s diverse portfolio because they have consistently provided enormous money growth and tax benefits. As with any investment, there may be some “pros” and “cons” that may generate the perception of them as “good” or “bad” options. Yet despite those perceptions, annuities can provide clear and sound investment option that are suitable to the needs of a variety of investors of all ages and investment needs.

Annuities have certain characteristics that may be appealing to an investor. Whether they are a good or bad investment choice, lies in the investor knowing and understanding what his or her immediate and future needs are, and what options he can utilize to meet those needs. Annuities are investment contracts that are purchased by an investor from an insurance company, usually in exchange for future payment.

There are several types of annuities that are offered and which make a substantial contribution to an investor’s portfolio. The primary benefit of annuity is that a purchaser can continue to invest in the account, while deferring taxes on the growth for years until he makes his first withdrawal. This allows his purchased funds to grow for years without being taxed. Further, an annuity can provide a stable, steady, and predictable income stream for either a predetermined amount of time – say, for twenty years or for the rest of the investor’s life. Purchasing an annuity can therefore deliver an immediate or deferred payout, whichever is most beneficial for the investor. Keep in mind, the longer the annuity is deferred, the greater amount of the periodic income stream will be.

Since annuities are purchased contracts between insurance companies, and not a traditional banking institution, an investor is not covered under the traditional FDIC protections like other traditional banking accounts are. Investors are therefore investing in the soundness of the insurance company issuing the annuity. Yet the industry offers investors some level of stability and relief by setting the precedence of other insurance companies buying up the contracts of the company that is headed for bankruptcy. In addition, nearly all states have created groups or associations to protect the investor in case an insurance company goes bankrupt.

It is always prudent for the investor to maintain updates on the health and solvency in the institution that is holding his money. Reading the quarterly reports, statements, and annual prospectus can help keep an investor grounded. If the company in question may not be as healthy or is not offering the service an investor would want, the investor can often switch annuity companies and incur not tax charge. There may however, be a modest transfer fee from the company holding the annuity.

Since annuities provide tax free growth until the investor withdraws funds from this account, they will deliver a penalty for early withdraws. This means that unless you are 59.5 years old, you will get penalized from making a withdrawal on the investment. Therefore, once opened, the liquidity of the account remains dependent on the investor’s age. Annuities can offer a variety number of options with either a fixed rate, variable, or indexed funds. These allow for strategic investment planning based on any number of given factors such as age, financial needs, and risk aversion.