Annuities: Are They a Smart Investment? The Best, Worst, and Ugliest

Annuities: Are They a Smart Investment? The Best, Worst, and Ugliest

You could have already overheard insurance or investment consultants discussing them. In reality, I previously discussed a number of reasons for and against purchasing annuities.

The short answer is that it depends if you ask me on the street if annuities are a good investment.

In this article, I’ll define annuities, explain why some people purchase them, outline two specific annuity forms, and provide some possible alternatives.

Do not hesitate to contact me if you have any questions! I can also assist you if you want to locate some of the top annuity estimates. Let’s get going now.

Annuities Defined

As a first step, let’s define an annuity:

Someone receives an annual payment of a set amount of money, usually for the remainder of their lives.

The core idea is rather straightforward. But the issue at hand is still far from being fully explored.

Why Do People Buy Annuities?

It goes without saying that people purchase annuities in order to reap some alleged benefits. Safety is seen as the key perk.

Among the safe annuities are the following:

  • The fixed annuity
  • Instantaneous single-premium annuities
  • Annuities with Deferred Income
  • Annuities with fixed indexes

I’d like to cover fixed indexed annuities in a moment, but first, let’s take a look at an unsafe option . . 

Are Variable Annuities a Good Investment?

The variable annuity is one item that isn’t included on the safety list. Although I don’t usually agree with Suze Orman, I do in this instance: Suze is correct. And many others are as well.

Here is what Strategic Income Group’s Michael Gauthier, a CERTIFIED FINANCIAL PLANNERTM, has to say:

One of the most oversold products in the financial services sector is variable annuities. Due to the high costs attached to these investments, especially for those who are in the Amassing Wealth Phase of their lives, the process of actually accumulating wealth tends to be slowed down. The majority of investors would do better to invest in suitable mutual funds or ETFs that offer lower costs.

Here’s what Todd Tressider at says about variable annuities:

. . . Consumer advocates claim that some variable annuity fees are so high that it may take more than ten years for them to outperform simpler investments, that the benefits are overstated, and that the restrictions and penalties are not fully understood.

Here’s what Alan Moore, CERTIFIED FINANCIAL PLANNER™ at Serenity Financial Consulting says about variable annuities:

I don’t think the vast majority of people actually grasp how variable annuities work because they are so complicated and hard for most financial counselors to understand.

According to a Wall Street Journal article by Jane Bryant Quinn, she would like to take all variable annuities and shatter them into smithereens. That’s rather direct, huh?

According to John Biggs of TIAA-CREF, purchasing a variable annuity is never advised.

AARP has written extensively about the drawbacks of variable annuities.

Whoa. Variable annuities offend celebrities.

I’ll tell you why.

By purchasing variable annuities through a variable annuity firm, you are purchasing mutual funds. While those firms may brag about the 80 to 300 mutual funds you have access to when purchasing a variable annuity, if you simply register a Scottrade account, you have access to many more possibilities (around 29,000 mutual funds).

Fees are another another factor that makes variable annuities problematic. 3.61 percent is the national average for variable annuity fees. Yikes!

Oh, and just because the phrase “guaranteed” appears in your policy does not indicate that you will actually receive a guaranteed return. See what the SEC has to say here:

You might wish to think about the insurance company’s financial stability before purchasing any variable annuity. The ability of the company to pay any benefits, such as death benefits, guaranteed minimum income benefits, long-term care benefits, or sums you have allocated to a fixed account investment option, that are greater than the value of your account in mutual funds investment options, may be impacted by this.

You read that right.

For new plans, companies do not need to be in financial problems to remove the death benefit or income riders, though they occasionally try to alter existing policies when they can. One business offered a flat amount to entice customers to renounce promises. Another demanded certain adjustments, or the riders would be dropped.

It’s critical to realize that alterations to a company’s policy may have an impact on your ability or desire to continue receiving those perks.

In conclusion, you should read the fine print on guaranteed death benefits and income accounts carefully before you sign anything.

Fixed Indexed Annuities

The fixed indexed annuity is one of the annuities on my list of safe investments.

These are fantastic since you are genuinely guaranteed not to lose the money you invest. It’s a good thing, folks, that any deposits you make or gains that are credited get locked in at various time intervals! This implies that values may only rise and never fall.

So, should you get a fixed indexed annuity now? No, not always. There are alternative choices notwithstanding how much superior they are than variable annuities. Soon, I’ll say more about that.

Placing growth caps is another typical practice of fixed indexed annuities. For instance, if the investment index increases by 30% in a year, you might only be allowed to make a gain of, say, 4% and lose out on a gain of 26%. Every policy has a different cap, so be careful to do your homework on the cap that applies to the fixed indexed annuity you are thinking about. Additionally, the caps may alter with time.

The good news is that you may be eligible for a return of premium (ROP) on certain of these plans, which occasionally stipulate that you may request a refund for any reason at any time. That’s really nice.

Additionally, certain fixed indexed annuities have uncapped upside potential, which means there is no upper limit, and some of them offer two times the payout for qualifying medical conditions.

Benefits for lifetime income are the other assurance provided by fixed index annuities. You will be able to continue receiving a paycheck because of this, possibly along with your husband. And in contrast to a pension, if you have any leftover funds, they will be given to your heirs.

Do all these advantages, however, make sense to you?

Annuity Alternatives

Keep in mind that you don’t have to sign on the dotted line simply because there are some fantastic fixed indexed annuities.

I consult with customers who had read about a particular annuity, thought it sounded excellent, and felt it was the best financial decision for them. They became enthused about the advantages of a certain investment and failed to think to look at other investment opportunities since they didn’t take a step back and weigh their options.

I’d like to take a few minutes of your time to talk about some alternatives to annuities because of this.

Undoubtedly, the guarantees associated with annuities are what pique your curiosity. How can you secure your finances without purchasing an annuity, then? Here are some possibilities.

Insured High-Yield Savings Accounts

This is the greatest choice if you want a guarantee that you won’t lose money. Many savings accounts in the US are covered by the FDIC or NCUA up to $250,000 in insurance.

That’s right, you’ll still have a guarantee that you’ll get your money back even if the bank or credit union fails. That’s a lot!

Just for you, I’ve compiled a list of the top online high-yield savings accounts. You’ll observe something, though. In these accounts, your money will probably not rise as much as it might in the stock market or a fixed indexed annuity.

Let’s examine a different alternative.

Stock Market with AssetLock™

AssetLockTM is a proprietary program that can only be obtained from a small number of advisors. Your stock market accounts will be monitored by the software every single day.

Investors can always see the following four numbers on AssetLockTM:

  1. High Water Value – The portfolio’s highest value at any time.
  2. High Water Date – The day your portfolio’s value was at its highest point ever.
  3. Current Account Value – the most current closing price on the previous trading day.
  4. AssetLock™ Value – The maximum amount of downside (loss) that the portfolio is expected to endure over the course of the client’s investment.

To assist you in avoiding a stock market meltdown, the software takes into account each of these aspects. And what’s even cooler is that you can access this data directly on your computer, smartphone, or tablet.

Depending on what makes sense for you, you can set your AssetLockTM Value at 5 percent, 10 percent, or 15 percent. You can set it to 5% if you’re more risk-averse and prefer less risk. It’s up to you if you want to set it higher, at 15 percent, if you’re feeling more assertive.

So, Are Annuities a Good Investment?

Hopefully, by this point, you have determined the answer for yourself. Everybody’s circumstance is unique.

I’ll say it again: Annuities are typically not a wise investment. In certain circumstances, using AssetLockTM to invest in the stock market makes a lot of sense since it combines a high level of safety with possibly larger profits.

When investors desire a guarantee that they won’t lose any money, fixed indexed annuities may make sense in other circumstances because the stock market with AssetLockTM cannot offer that level of assurance. But keep in mind that by capping your fixed indexed annuities, you are reducing your prospective gain.

Choose the investment that is best for you by taking your options and circumstances into account.

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