The Truth About Annuities

The Truth About Annuities

If used properly annuities can be purchased to protect assets or replace the safety that some bonds often provide.  They are sometimes used to provide a guaranteed stream of income, like pension plans and social security.

Let’s explore the definitions: An annuity is a contract issued by an insurance company and often offered through insurance agents or a properly licensed financial advisor. Insurance agents are usually allowed to offer indexed or fixed annuities only, while a FINRA or SEC licensed advisor may direct you towards what’s known as a variable annuity contract.

What are the four basic types:

Immediate annuity

Similar to a Pension or Social Security, you would trade a lump sum of cash for a guaranteed income either for a certain period of time or for the duration of your life.

Pros

Cons

Fixed Annuity

Similar to a bank CD, without the FDIC coverage. Basically, you lend your money to an insurance company and they pay you a fixed rate of return for a fixed period of time.

Pros

Cons

equity indexed annuity

This is an insurance product that’s often sold as an investment that mirrors the S&P 500 index without risk or cost and this is simply not true. An indexed annuity may provide a lifetime income but in many cases you are doing nothing more than receiving your own money back for an extended period of time, plus a modest interest. Once the accounts goes to $0 the annuity company may offer a rider that allows you to extends the income over your life.

Pros

Cons

Variable annuities

Can only be offered by a properly life licensed financial advisor with a FINRA or SEC license.

Pros

Cons

Overall a variable annuity can be a welcome addition to a retiree’s portfolio that is looking for the additional stability and in some cases the tax deferral that these investments offer. Contact us if you currently have an annuity and would like a second opinion on its viability or if you’re considering purchasing an annuity as part of your portfolio. Our experts will be happy to guide you on your decision, please use extreme caution prior to investing in any annuity product.

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