Pros and Cons of Annuities
With Americans living longer these days, the thought of it is very comforting to the extent of knowing that we will be around a lot longer for our families, friends, and loved ones. With many of us though, the trade off is worrying about the possibility of outliving the savings we built up for our retirement years.
Between healthcare expenses and inflationary cycles of the economy, it can be financially crippling. You may be able to offset this financial quandary by finding the best annuity rates on immediate annuities or SPIA’s - single premium immediate annuities. While most annuities are designed for building retirement value, SPIA’s were specifically developed to provide immediate income once you enter into your retirement years.
As with other annuities, immediate annuities are contracts between your insurance company and you. Additionally, the more conservative investor tends to invest lump sums of money in these so that they can cover their retirement expenses over a long period of time. In return for the lump-sum investment, you are paid a monthly income until you pass away.
The advantages and disadvantages of immediate annuities
Immediate annuities require that the account holder or annuitant deposits a lump-sum payment and in most cases, they start receiving scheduled payments almost immediately after setting up the contract with their insurance company. The annuitant also has the option to receive those payments over their lifetime or a fixed period of time. The following is a list of the advantages and disadvantages of investing in immediate annuities.
The advantages:
Benefit of Exclusion ratio- refers to the non-taxable portion of the annuity and defined as the repayment principal amount
Better returns on investment – immediate annuities provide offer very attractive repayment rates especially during economic times when values are spiraling downwards with other investment instruments
Protection from creditors – even during times of financial hardship, immediate annuities will provide you with an income. Many states offer protection from creditors attaching the account. They are an excellent option should you have to declare bankruptcy.
Regular income stream – probably the primary benefit is the regular income that an immediate annuity provides the investor with. This is especially true for those individuals who do not have the luxury of a regular revenue source.
The disadvantages:
A double-edged sword – realize that if you choose the lifetime payment option, that insurance company is obligated to make those payments for the duration of your lifetime. However, if you should pass away in the first 30 days, that insurance company will take what you have contributed and your heirs will never receive any benefits.
Fair returns on investment – when compared to the returns that you could realize with stocks, these are considerably less. If you are looking for a higher rate of return, this is not an investment to pursue.
Inflationary weaknesses – statistically, the income value of annuities has always been eroded by inflation and immediate annuities are no exception, so you should be cautious if you choose to invest in any of these.
How To Choose An Annuity Provider
If you have decided to save for retirement, you may have checked out the various possible investments—stocks, bonds, bullion, CDs, and so on. But the annuity stood out to you as a stable source of future income with regular payments, and you decided to go with it as you’re a conservative kind of person.
Now you have a quandary: There are countless insurers out there offering annuity contracts, and you have no idea which one is the best company to deal with.
Don’t worry. Though there may be many insurance companies out there, it shouldn’t be difficult to find the annuity contract that’s right for you based on a few simple guidelines.
Premium Payments
First and above all else, you have to choose an annuity provider that’s realistic for your income bracket. Some companies promise higher interest payments and more favorable terms, but their premiums can be quite large. It would make no sense to render yourself incapable of providing for yourself now by paying massive premiums with the idea that the annuity payments would enable you to provide for yourself later on.
Always make sure that your premium payments are manageable, and take into account the potential requirement for extra expendable cash for emergencies in the future. Leave plenty of breathing room in your budget after you have accounted for your premium.
Reliability
With the financial sector crash of 2008, it’s important that your annuity is provided by a stable company. A fly-by-night company may offer you better terms, but will they be around in 25 years from now? Try to find a stable company that’s been around for years, so that you have the peace of mind of knowing that your annuity payments will be available years from now.
Transparency
Transparency is always important in a company, but it is especially important if you buy equity-indexed annuities or other variable interest rate annuities. Your annuity provider should be clear about what kind of management fees it charges for handling the annuities, what the qualifications are of the annuity fund managers, and what sectors and even what specific companies are being invested in with the annuity funds. Responsible fund management is crucial to getting good returns on your premium payments.
Flexibility
Many annuity providers will only pay to the premium payer and not allow for any beneficiaries to be listed on the contract. If you have a family, you may wish to provide for your loved ones after you have passed on. In this case, flexibility is important, and you should look for an annuity provider which allows you to list your family members as beneficiaries on the annuity contract, and at a reasonable price for this added benefit. If you cannot do this, your annuity payments will cease with your death and your loved ones will not be taken care of.
Hopefully these basic principles are helpful when you decide on the annuity provider that’s right for you. Just remember, many annuity companies are the same, and if you stick to these criteria you will have a good financial foothold on the future.