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News / Finance

The Good and Bad of Annuities

Annuities Product Lines are Diverse with Advantages & Disadvantages

Fixed Interest Rate Annuities

The company that issues the annuity sets the current rate of interest it will pay on its contract with you and revises it periodically. Rates may be adjusted monthly, annually, or less frequently. When the rate changes,
it sometimes increases and sometimes decreases, reflecting what’s happening in the economy at large. But it can never go below he guaranteed rate, the state-mandated minimum that’s set when you buy the annuity.

Guaranteed Lifetime Income Annuities

You can set up your immediate annuity to pay out income monthly, quarterly, semi- annually, or annually. That can be a big advantage over other income-producing investments such as bonds, which typically pay on a fixed, semi-annual schedule. And remember that immediate annuities provide an additional benefit, since part of each income payment is return of principal on which you owe no tax. One criticism sometimes leveled at income annuities is that you lose control over your assets. However, some immediate annuities let you commute your contract, which means you can accelerate your payments, or take some or all of the cash value minus expenses in a lump sum at any point.

Indexed Annuities

By protecting your principal against
market downturns, the issuer of a fixed
index annuity insulates you against market volatility—provided, however, that you
hold your annuity for the index period
during which you’re accumulating interest. That period is often 10 years from the
date you sign the contract though it may be as short as 5 years or as long as 15. But if you surrender your contract
before the end of the index period, two things happen. You pay a surrender fee, which may be 10% of your premium
or higher in the first year and typically
drops one percentage point each
year until it disappears. In addition,
what you’re repaid is the guaranteed minimum account value of your
account. That’s typically 87.5% of
your premium plus any interest that
has accumulated. Some but not all con- tracts have a guaranteed minimum rate. As with other fixed annuities, the contract guarantees are backed by the issuer’s ability to meet its financial obligations.

Variable Annuities

Variable annuities have many of the same features as fixed annuities— including tax-deferred earnings and a choice of payouts, plus the opportunity to make unlimited contributions if the annuity is nonqualified. In addition, they offer the potential for greater returns and the opportunity to make your own decisions about how to allocate your assets among investment funds offered through your contract. A potential downside of variable annuities, though, is that the return is not guaranteed. You may have only small gains—or no gains—in some periods and you could lose principal. In the last ten years, variable annuities have maintained their pricey expense loads and at the same time lowered their benefits.

Contributions from the books Guide to Understanding Annuities in this press release are used with permission from Light Bulb Press.