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Discussing The Pros & Cons Of Annuities

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It depends who you ask. For those selling annuities, the answer is usually yes. For those who only sell competing accounts like stocks, bonds and mutual funds – the answer is almost always no. Most everyone has some skin in the game and they’ll work hard to make the case for their products over others.

There is not a right or wrong answer to whether you should own an annuity. Investments are very subjective and what’s right for you may not be right for your neighbor. Your short and long term goals, risk tolerance and income needs are just a few of the many factors that might help to answer this question.

How Much Market Risk Can You Tolerate?

The markets have been on several wild swings over the last 15 years. Several economic, technological and political factors have increased market volatility and it’s unlikely that these startling ebbs and flows will disappear any time soon. In fact, they are becoming more frequent.

If you’re younger and don’t plan on accessing your funds for several years, maybe you can weather these unnerving downturns. But as you grow older and have accumulated a sizable nest egg, there are certainly safer places to protect and preserve your wealth than the stock market.

Fixed and indexed annuities (not variable) will decrease your overall market exposure and provide insurance against losses that can take several years to claw back. These accounts may not grow as quickly as some high-flying stocks, but the idea is to reduce your overall risk once you’ve accumulated the wealth to protect. You feel the losses much more than the gains when you are near or in retirement.

If you’re risk averse, then some annuity contracts can be a good fit. Annuities provide protection against losses and will safeguard a portion of your assets. Conversely, if the ups and downs of the market do not negatively impact your financial and mental well-being, then the markets might be more suitable. It’s subjective and it depends on your overall risk tolerance and state of mind.

In Need Of Guaranteed Income Now Or In The Future?

What are your short and long term investment goals? Is present or future income of great importance? Certainly, fixed annuities are some of the most reliable instruments in providing systematic monthly income. And indexed annuities with a deferred income rider can guarantee steady or increasing lifetime income streams in the future.

So why do some pundits argue so aggressively against these products? Most have a financial interest in competing investments, but in fairness there are some who feel there might be better ways to achieve your goals. This second group might have good intentions, but when they’re wrong – it’s your financial well-being at stake.

No one can predict how variable investments are going to perform over the long haul. This is not your grandfather’s stock market and anyone trumpeting gains from yesteryear is probably in denial about the extreme volatility of today. Investing a portion of your portfolio in an annuity suitable to your needs can guarantee systematic income now and in the future. That known income will add safety, security and diversity to an otherwise at-risk portfolio.

I Heard Annuities Have High Commissions

Yes, annuities offer commissions to the agents who sell them. We live in an incentivized world that compensates those selling financial and insurance products. The problem is that some investor-types incessantly rant about annuity commissions as a means to dissuade and distract consumers.

Almost all financial products pay commissions. Annuity commissions cover a wide range. Some are higher than others, but with a little research, you can certainly find accounts offering low compensation and high growth potential.

Fixed and indexed annuity commissions are paid to the agent by the insurance company; they never come out of your investment. If you send $100K to the annuity provider, your broker will be compensated, but your principal will not decrease. The insurance company pays the agent out of their reserves which they expect to recoup over time based on portfolio spreads.

Our advice: Don’t rule out annuities based on what the vocal minority are saying about commissions. Many pay 3% or less only one-time to the agent. This is far less than what a financial advisor would charge after only a few years of management. There are of course some that pay agents more – upwards of 7-8%. Those accounts with higher commissions tend to have longer surrender schedules. It’s important to be certain longer term annuities fit your goals and investment timeline.

Bottom line: There are very few commission-free investments. But let’s just remember that those selling stocks and bonds are not working for free – and over the course of just a few years will make far greater than the commissions mentioned above.

Do Annuity Accounts Offer Access To My Money?

“Annuities will tie-up your money and you don’t have access to your principal!” That’s a common refrain from those who would never recommend an annuity product no matter how beneficial it might be.

Yes, annuities have surrender terms and some are longer than others. Deferred income annuity accounts are usually established for the long haul in order to guarantee lifetime income for single and married investors.

The mistake some people make is putting too much money in annuities and not leaving enough liquidity in other accounts. This problem can be magnified by aggressive agents who sometimes give the industry a bad name. Annuities should be a part of a diversified, well-balanced portfolio, but not the only asset.

Annuity investments become more liquid over time which is why some investors will stagger their accounts to mature in different intervals. Before maturity however, you will almost always have access to a portion of your principal  – usually a minimum of 10%. Some accounts will offer more than 10% or even a full return of premium surrender-free. If liquidity is a major concern, then a good agent should be able to find an suitable product.

Contact Us To Discuss Your Investment Needs & Goals

In a nutshell, it’s time to cut through the manufactured hype created by those who have a financial interest placing your dollars in a turbulent market. There are safer, more calming asset classes that can be more appropriate for some investors.

A well diversified portfolio should likely include stable insurance products that are not subject to the whims of the markets. Contact us today to see if an annuity might be a suitable investment for you.

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