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Fixed Indexed Annuities vs. Alternate Investments

How do fixed indexed annuities stack up against other investment options?

This question and answer editorial in the Dallas Morning News points out the need for analytical inspection of investments in the proper context. CBA Share price has been capturing the interest of many investors these days, so it may be a good option to check out.

One main point left out is the additional benefit of tax deferral that is inherent in all annuity contracts.  If alternate investments are held outside of tax deferred retirements accounts, annuities will provide a significant account value advantage.

Always do your homework and choose an advisor who won’t overlook any of the benefits or disadvantages.

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Variable Annuities:  Pros and Cons
No other product in the Annuity business creates as much controversy as Variable Annuities.  Frankly, I’m getting kind of tired of all the loud opinions about variable annuities- it’s either a table thumping BUY or a screaming SELL.  It’s  just like watching Jim Cramer on Mad Money.   There’s no middle ground, and if you follow the BUY side (selling agents) every sales office should have a line of people waiting to buy.  Listen to the SELL crowd (journalists and many financial planners) every insurance company would be shut down because of fraud.

I know that sounds extreme but it really does show you the difference in the type of advice you are bound to get.  So if you are familiar with my work, you’ll know that I try to be objective and provide solid evidence as to the pros and cons of annuities of All shapes and sizes.

Frankly, I’ve avoided writing this for a long time, because these are complicated beasts and it’s hard to make any kind of apples to apples comparisons.  But I’ll tackle the variable annuity debate in this article.  Before I go further, let me say that even after my  research and experience in the industry, I am not overwhelmingly for or against variable annuities.  Like a lot of things in life, there are times when they work great and others when they are completely inappropriate.
Pros of Variable Annuities
Guaranteed Benefits:

Death Benefit- This allows the heirs of the contract to inherit the full principal balance in the event that the contract owner passes away while the contract is in force and the account has lost value

Income- This allows the contract owner to lock in a predetermined level of future income regardless of account performance.

Principal- This allows the contract owner to recover the principal investment or the highest contract value achieved regardless of the account value at time of surrender.

Tax Deferral:  Taxes are deferred on the growth of assets inside an annuity giving the contract owner the added benefit of greater compounding.  Many critics suggest that excessive fees mitigate tax deferral benefits.  If tax deferral is the sole focus of purchasing an annuity, expensive optional riders can be waived so that total fees will run no higher than the average mutual fund.

Unlimited Contributions: Retirement plans have contribution limits.  If you ever come in to a larger sum of money, much of it will not be eligible for allocation in a 401K, IRA, etc.  Annuities have no contribution limits.
Cons of Variable Annuities

High Fees:  Many annuities have optional riders that push the overall fees to 3% or more.  Plenty of products allow an investor to elect out of the options but some don’t.  If you are purchasing an annuity with high fees, there had better be compelling reasons to do so.

Limited Investment Choices: Asset allocation options are limited within an annuity.  Some contracts have predetermined portfolio balances and others will list a limited number of available mutual funds.

Surrender Charges: As with all annuities, variable products have surrender charges so your money is tied up for a specified period of time except for the usual 10% annual free withdrawal. Be positive that the surrender schedule works with your investment time horizon.

Immobility: The combination of investment limitations and surrender charges means that your money is much less mobile than it would be in an equivalent securities account.

As you can see, the analysis is pretty simple.  If you are looking at the prospect of a variable annuity just weigh the pros vs. cons to figure out if it works for you.

For most of my customers and following our decision tools to Buy Annuities, most of the cons seem to be deal breakers if even if a few components are tolerable.  Overall, for me, the cons outweigh the pros most of the time.  Variable annuities have specific uses for a small class of investors that either works for you or it doesn’t.  Make sure to seek solid advice from an open-minded advisor.

Fixed Annuities are the easiest of all annuity products to understand. You invest money with the insurance company and they pay you interest. 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 it does get more complicated but that’s why I did so much work to give members of this site all the tools they’ll need to make a good decision.
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.
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.

For now, that’s 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 greedy agents selling them. That’s why you need The Annuity Report so you can understand the specifics of fixed annuities in detail. This valuable creation of mine is available for download with a free membership to this website. From this report, you’ll learn how to tell the difference between a good product, company or agent and a bad one.
Pros and Cons of Fixed Annuities

This product is the easiest of all annuity products to understand.  You invest money with the insurance company and they pay you interest.  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 it does get more complicated but that’s why I did so much work to give members of this site all the tools they’ll need to make a good decision.

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.

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.

For now, that’s 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 greedy agents selling them.  That’s why you need The Annuity Report so you can understand the specifics of fixed annuities in detail.  This valuable creation of mine is available for download with a free membership to this website.  From this report, you’ll learn how to tell the difference between a good product, company or agent and a bad one.

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Pros and Cons of Variable Annuities

Understand The Pros and Cons of Variable Annuities

No other product in the Annuity business creates as much controversy as Variable Annuities.  Frankly, I’m getting kind of tired of all the loud opinions about the Pros and Cons of Variable Annuities- it’s either a table thumping BUY or a screaming SELL.  It’s  just like watching Jim Cramer on Mad Money.

There’s no middle ground, and if you follow the BUY side (selling agents) every sales office should have a line of people waiting to buy.  Listen to the SELL crowd (journalists and many financial planners) every insurance company would be shut down because of fraud.

I know that sounds extreme but it really does show you the difference in the type of advice you are bound to get.  So if you are familiar with my work, you’ll know that I try to be objective and provide solid evidence as to the pros and cons of annuities of All shapes and sizes.

Frankly, I’ve avoided writing this for a long time, because these are complicated beasts and it’s hard to make any kind of apples to apples comparisons.  But I’ll tackle the variable annuity debate in this article.  Before I go further, let me say that even after my  research and experience in the industry, I am not overwhelmingly for or against variable annuities.  Like a lot of things in life, there are times when they work great and others when they are completely inappropriate.

Also, while we don’t sell variable annuities, this website would not be complete without this  information on how variable annuities work and their pros and cons.  While variable annuities do make up the majority of annual annuity sales, we use safer, more guaranteed methods of creating stable retirement income.  It you have a question about an existing variable annuity or want to consider other alternatives such as Secondary Market Annuities or Index Annuities, please Contact Us.

Pros and Cons of Variable Annuities: Pros

Guaranteed Benefits:

  • Death Benefit This allows the heirs of the contract to inherit the full principal balance in the event that the contract owner passes away while the contract is in force and the account has lost value
  • Income– This allows the contract owner to lock in a predetermined level of future income regardless of account performance.
  • Principal This allows the contract owner to recover the principal investment or the highest contract value achieved regardless of the account value at time of surrender.
  • Tax Deferral:  Taxes are deferred on the growth of assets inside an annuity giving the contract owner the added benefit of greater compounding.  Many critics suggest that excessive fees mitigate tax deferral benefits.  If tax deferral is the sole focus of purchasing an annuity, expensive optional riders can be waived so that total fees will run no higher than the average mutual fund.
  • Unlimited Contributions: Retirement plans have contribution limits.  If you ever come in to a larger sum of money, much of it will not be eligible for allocation in a 401K, IRA, etc.  Annuities have no contribution limits.

Pros and Cons of Variable Annuities: Cons

  • High Fees:  Many annuities have optional riders that push the overall fees to 3% or more.  Plenty of products allow an investor to elect out of the options but some don’t.  If you are purchasing an annuity with high fees, there had better be compelling reasons to do so.
  • Limited Investment Choices: Asset allocation options are limited within an annuity.  Some contracts have predetermined portfolio balances and others will list a limited number of available mutual funds.
  • Surrender Charges: As with all annuities, variable products have surrender charges so your money is tied up for a specified period of time except for the usual 10% annual free withdrawal. Be positive that the surrender schedule works with your investment time horizon.
  • Immobility: The combination of investment limitations and surrender charges means that your money is much less mobile than it would be in an equivalent securities account.

Pros and Cons of Variable Annuities: Summary

As you can see, the analysis is pretty simple.  If you are looking at the prospect of a variable annuity just weigh the pros vs. cons to figure out if it works for you. For most of my customers using the decisions tools we outline in the Annuity Report, available by free download to our members, most of the cons seem to be deal breakers if even if a few components are tolerable.  Overall, for me, the cons outweigh the pros most of the time.

Once you understand the pros and cons, Variable annuities have specific uses for a small class of investors that either works for you or it doesn’t.  Make sure to seek solid advice from an open-minded advisor.