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Pros and Cons of Annuities

Abhijit Naik Oct 28, 2018
Opting for a financial tool without taking into consideration its pros and cons can put you in a difficult situation; annuities are no exception. If you are planning to opt for annuity, here is a short list of its pros and cons that you need to go through before you sign the dotted line.
Many people are opting for capital investment as a part of retirement planning to make their future financially secure. One of the most talked about method of capital investment nowadays is annuity wherein the person invests money and gets monthly returns for the rest of his life.
While the person has the liberty of choosing to pay in full or in series of installments, monthly payments only commence when the premium is cleared.

Types of Annuities

Basically, insurance companies are the ones that sell annuities, while people who are on a lookout for steady income post-retirement are the ones who buy them. There are various types of annuities, classified, depending on where assets are invested, when annuity payment begins, and the method of premium payment.
Some of the most prominent types of annuities are fixed annuities, variable annuities, indexed annuities, immediate annuities, deferred annuities, single premium annuities, flexible premium annuities, etc.
The benefits of each of these annuity types differ from the other (Fixed annuities, for instance, assure a specified rate of interest for a certain period, while variable annuities offer a greater opportunity for growth - though the risk involved in them is also high.), and that makes it important to evaluate these benefits before opting for a specific type.

Pros and Cons of Annuities

Annuity is considered to be one of the best ways to ensure a quality future but like other financial tools, annuities have their own pros and cons. Firstly, not many people are aware of the intricacies of annuities. Secondly, the agents who sell annuities stress only on the positives of their product and ignore the negative aspects of the same.
As a result of this, most of the people end up buying annuities which are not ideal for them and end up in difficult situations. That being said, the onus is on you as the customer to get well-versed with the basics before approaching the agent in order to avoid any problems in the future.

Benefits of Annuities

When it comes to retirement planning, annuities are preferred by many people as they offer significant benefits over other retirement tools. Here are a few of the benefits which will help you determine whether opting for annuity will be worthwhile for you:
  • An immediate lifetime annuity contract can ensure you guaranteed periodic payments for the whole life.
  • It's a dependable option for those who don't want to take the risks where there are chances of losing a part of the savings.
  • They have the capacity to replace employer sponsored pensions as reliable retirement tools.
  • It's a steady source of income for those who are afraid that their resources will get exhausted in course of time.
  • As their name suggests tax deferred annuities allow investments to grow tax deferred, which is again a major benefit.
  • More importantly, anybody can contribute on their will as there is no restriction bar for investment.
  • Annuities can be customized to suit your requirements, which, in turn, makes your pockets inflation resistant.
  • Annuities are actually life insurance contracts, which means probate can be avoided when beneficiaries are declared.
  • The sum value of annuity is guaranteed to be at par or above the value of invested amount.
  • Lastly, annuities are backed by the state guarantee funds, and therefore even if the company cannot pay, investments are not lost.

Drawbacks of Annuities

Not everything is pleasant about the annuities though, as they have their own drawbacks as well. Here are a few of these drawbacks which you can't afford to ignore.
  • Annuities are regarded as less flexible retirement tools when compared to other options in the market as they tend to trap the lump sum of money.
  • Annuities, which are meant to provide a steady income over a period, tend to be of no use when it comes to sudden expenses, involving a high amount.
  • The fact that it either requires a large initial investment or multiple smaller investments over a period as the premiums can also be an issue.
  • Though a safe investment, a fixed annuity doesn't facilitate sudden gains like the stock market.
  • The fact that you can't touch your funds once you have invested it, until you are 59 ½ year old is also a major drawback.
  • Funds which are withdrawn early are subject to a tax penalty of up to 10 percent.
  • It requires additional fee in the form of sales charges and surrender charges.
  • At times, it becomes difficult to make out which is a good annuity and which is a bad one.
  • The sales agent can also misdirect you into buying a wrong annuity as he gets sales commission for the same.
  • An annuity needs a long time span and a significant amount of investment.
You need to put in some efforts to make sure that you get the best possible deal, when buying an annuity. Although going through the fine print can be a tiresome task, it's of utmost importance and hence shouldn't be avoided. More importantly, you need to make sure that you deal with a trustworthy financial adviser.
At the end of the day, being well-versed with all the intricacies of annuities can help you to avoid a certain financial disaster to a great extent.