Annuity Pros and Cons
While its convenient for investments to be thought of as good or bad, it’s more
accurate to think of annuities or any investment opportunity as suitable
or unsuitable for your goals, objectives and circumstances. Here is a listing
and brief explanation of annuities pros and cons.
Fixed Annuity Pros and Cons
Illiquidity—fixed annuities typically have surrender charges
(really withdrawal penalties) making annuities illiquid and only
suitable for long term investors. However, we have occasionally
seen one year fixed annuities offered.
Low rate—Fixed annuities, considered a conservative and safe
investment option typically pay low rates, maybe 1% more
than 5-year CDs at the bank.
Very safe—we have never heard of anyone losing money in a
fixed annuity. Life insurance companies are the most stable
of financial institutions and even when these have failed,
the annuity owners’ money has been protected by a State guaranty
fund or more commonly, another life insurance company assuming
the failed company’s obligations.
Annual Withdrawal Feature—a feature among fixed annuities
pros and cons that is rarely considered is the annual withdrawal
feature. In most annuity contracts, 10% of the balance can
be withdrawn each year without penalty. In some contacts
this is a cumulative feature. So if the investor selects
the fixed annuity as a long term wealth accumulation vehicle, the
ample annual withdrawal feature is a plus.
Tax deferral—all annuities offer tax deferral of gains and
Variable annuities pros and cons
The pros and cons of annuities warrant attention to safety.
With fixed annuities, your principal is guaranteed by the
issuing insurance company. With variable annuities, this
is not the case.
Fees—variable annuities often have significant mortality
and expense fees which eat into your return
Investment Choice—some variable annuities offer over 100
Other annuity pros cons would take into account benefits
to heirs (variable annuities offer a minor death benefit),
the offset to tax deferral which is the fact that taxes are
eventually paid at ordinary income rates (not capital gains
rates) and the various riders which provide protection of
principal and income guarantees in modern variable annuities.
Learn more about annuity
pros and cons.