Understand the Pros and Cons of Fixed Index Annuities

Top 5 Pros and Cons of Annuities

Top 5 Pros and Cons of Annuities

Pros and Cons of Annuities

As with any investment you consider, there are pros and cons of annuities too. When you purchase an annuity, you will want to time your purchase according to your needs, or how far away from retirement you are.

What follows is a discussion of the pros and cons of annuities in general.  This is a very basic starting point, but you can learn a whole lot more in the AST Flex Strategy videos.

Pros and Cons of Annuities – Pro Annuity Points:

The advantages of getting an annuity are absolutely easy to understand. Here are some brief introductions of each.

  • Liquidity: Your money is accessible. Most contracts have an annual withdrawal clause that will allow you to take 10-15% of the account value each year without incurring any penalty.
  • Tax Deferral: Like an IRA, annuity earnings are tax deferred. This makes them more appealing than CDs, money market funds, or other safe investments.
  • Safety of Capital: Your money is safe in annuities. Insurance companies are required to keep cash reserves to ensure this. Most states also have a guarantee fund up to $100,000 per annuity for additional security.
  • Rate of Return: Annuities offer higher rates of return than other safe investments. Currently, annuities are yielding an average of 4% tax deferred in comparison to only 2% taxable with CDs. As our economic markets stabilize, annuity yields should increase accordingly. Annuity rates of return offer more stability in fluctuating markets.
  • Income stream:  Annuities that provide an income stream has been found to be one of the best retirement income vehicles according to a study done by New York Life and the Wharton Business School. After the first annuity contract year, most annuities can provide monthly income payments for your lifetime. Likewise, immediate annuities provide monthly income payments for your lifetime, but they start immediately.

Pros and Cons of Annuities – Negative Points:

The wrong annuity product can have negative effects on your retirement. It is important to know these cons so you do not purchase the wrong product for you.

  • Surrender Schedule: Because annuity contracts have surrender charges for withdrawing money before the contract matures in lieu of up front sales charges, you will be obligated to the terms of the contract. Some surrender schedules can be as long as ten years.
  • Short Term Money: If there is a chance you need all of your money returned to you in the short-term, say one to two years, an annuity is not right for you. It is best to only invest funds you will not need for at least the next five years.
  • Sales Commissions: As with any purchase, the sales agent will earn a sales commission. An unethical sales agent may not have your best interests at heart and will not show you the right product for your needs.
  • Liquidity: You may be referring back to the pros section and find liquidity featured there as well. While liquidity can be a pro, it can also be a negative in so much as you realistically knowing how much money you may need to access and when you will need it. Without knowing these answers, liquidity can easily turn into a negative.

Annuities have pros and cons, and this brief summary should help you analyze your annuity needs. Use these guidelines to determine what factors are important to you and you will have an easier time selecting the right annuity for you.

Understand The Pros and Cons of Hybrid Annuities

The Pros and cons of Hybrid Annuities

The Pros and Cons of Hybrid Annuities

Like all annuities, there are pros and cons of hybrid annuities.  Remember, a ‘Hybrid Annuity’ is just a fixed index annuity with additional add- on riders.

So in looking at the pros and cons of these hybrid annuities, be sure you actually NEED all the benefits these contracts offer.  Nothing comes for free, and why pay for something you don’t need?

(This is the main message of the FREE AST Flex Strategy videos, so check it out!)

Pros and Cons Of Hybrid Annuities- The Positives

First, the pros: Hybrid Annuities offer a unique combination of benefits that accomplish many typical objectives in retirement income planning:

  1. Hybrid annuities offer partial market participation
  2. As with all fixed index annuities, there is no risk of loss to principal
  3. With guaranteed lifetime income riders, you have lifetime income
  4. As with all annuities, there is the potential for liquidity through withdrawals
  5. Unlike variable annuities, one of the main positive qualities of hybrid annuities is that they come with very low fees
  6. Finally, another pro to hybrid annuities is additional Long Term Care and Enhanced Death Benefit options

This really is a wide range of benefits rolled into one product.  For many people, it’s just perfect.  Lets look in a bit more detail at the pros….

Lifetime Income- This is reason #1 people are considering Hybrid Annuities.  Securing sufficient income for life is key to optimizing your assets.  Hybrid annuities are one way of achieving lifetime income.

Principle Guarantee- As with an Index Annuity, your initial investment has no risk of loss and may even be guaranteed to grow at a minimum rate.  The contract will state the minimum amount you can expect to receive at the end of the surrender period.

Tax Deferral– Like other annuities, the principal grows on a tax-deferred basis.

Reset Points Lock In Gains – Depending on the crediting method in your contract, reset dates may lock in gains that subsequently erode in the marketplace.  Timing is everything, but we have seen index annuities outperform markets due to the reset dates.

Charles Darwin

“The mule always appears to me a most surprising animal. That a hybrid should possess more reason, memory, obstinacy, social affection, powers of muscular endurance, and length of life, than either of its parents, seems to indicate that art has here outdone nature.

Charles Darwin

Now: The Problems With Hybrid Annuities

It’s critical to take a moment to investigate both the pros and the cons of the hybrid annuity.  As with anything, there are downsides to be aware of.

Income- You’re right, we listed this a one of the benefits of hybrid annuities too, however often we find that using an income rider on an index annuity is not the most efficient way to secure guaranteed income.

Complexity: Cap Rates, Participation Rates, Crediting Methods, Spreads:

All index annuities have a learning curve to overcome and hybrid annuities are no exception.  It can sometimes be hard to individuals to see the benefits when grappling with unfamiliar terms and calculations.

But, lucky for you, we at Annuity Straight Talk have recorded a superb and concise index annuity training video– just sign up to the right and get started on your way to being an expert in no time.  If you can get over the hump and understand how it all works, they really do offer a lot of benefits.

Perception Issues: Income Rider Account Value Vs Real Acct Value:

Perhaps our biggest issue when discussing Pros and Cons of Hybrid Annuities is one of perception and deceptive marketing by others.

If someone is telling you an annuity they offer is guaranteed to go up by some rate, like 8% per year roll up, they are lying to you.  It’s deceptive marketing that gives these products a bad name.

Rather, the Income Account Value may be guaranteed to roll up at 8%… but that is not real money you could walk away with.  If you don’t understand this concept yet, be sure to sign up and get our Hybrid Annuity Product Detail Report , and also, read up on Income Riders.

Final Negative: Long Surrender Periods- Hybrid annuities with lifetime income riders should be approached as a one way investment that you don’t plan to surrender.  You should consider the money invested as a permanent investment in a future lifetime income stream.  With that mindset, the long surrender is a non-issue, however if circumstances change, you should be aware that early surrender could be costly.

Hybrid Annuities: Pros And Cons Summary

How does it stack up for you with the Pros and Cons of Hybrid Annuities? Does the cap, participation, spread, and crediting method boggle the mind, or are you fine with the partial participation and  see the benefit in downside protection?

Feel free to explore the rest of these pages on Hybrid Annuities, but sometimes it’s best to just give us a call to go over your situation.  If you seek a qualified adviser well versed in Hybrid Annuities, please do not hesitate to contact us.