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The Pros and Cons of Fixed Annuities are the easiest of all annuity products to understand.
1) You invest money with the insurance company and they pay you interest.
2) When the investment term has expired, you can elect to have your account balance paid out as a stream of income or you can take the entire lump sum and go elsewhere.
That’s as simple as I can put it. Of course there are various pros and cons to understand to determine if a fixed annuity is right for you.
Pros and Cons of Fixed Annuities: Pros
The benefits of fixed annuities are quite clear…
Guaranteed Interest- You can lock your interest rate for the life of the contract with a CD-type annuity or choose a floating rate that moves up or down according to normal interest rate fluctuations. Either way, your interest is guaranteed to not go below a certain level as specified by the contract.
Tax Deferral- Accumulation within the contract happens on a tax-deferred basis so you have the benefit of additional compounding that gives an effective yield that outpaces other safe cash investments.
Free Withdrawals- Every contract comes with a provision that allows you to take anywhere from 10-15% of the account balance annually without penalty. This can be used to meet minimum distribution requirements in retirement accounts or for discretionary expenses. The money is yours so do whatever you want.
Ultimate Safety- Insurance companies are much more conservatively capitalized than banks so the guarantees mean more, in my opinion. The insurance industry has a much lower default rate than the banking industry and all states have an insurance guaranty fund that matches, and in some states, exceeds insurance provided to banks via the FDIC.
Pros and Cons of Fixed Annuities: Cons
The disadvantages of fixed annuities are equally as clear…
Surrender Periods- Fixed annuity contracts require you to keep your money invested for a specified period of time. In exchange for your commitment to keep your money with the company, there is no up-front sales charge for your purchase. The investment term is known as the surrender period and there is a back-end charge if you fail to fulfill your end of the deal. The surrender period must work within your time horizon. If you need more money than is available via free withdrawal before the end of the contract, this product is not for you.
Conservative Growth- Fixed annuities will never make you rich. They are meant for asset preservation and safe appreciation. These products work just before or during retirement because of safety; don’t expect rapid growth. If you’re a golfer then you know to use a driver on the fairway and a putter on the green. Consider this the best putter money can buy, but keep it in your bag until the time is right.
Pros and Cons of Fixed Annuities: Summary
For now, that’s about all I can say about fixed annuities. Proper placement in a retirement requires expert advice and analysis. In addition, there are thousands of available products and even more agents selling them.
That’s why you need The Retirement Income The Right Way Reportso you can understand the specifics of fixed annuities in detail. This valuable creation is available for free download from this website. From this report, you’ll learn how to tell the difference between a good product, company or agent and a bad one, and can weigh the pros and cons of fixed annuities for yourself. Simply enter your name and email in the form below.
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