Annuities can have disadvantages based on the product profile and the client suitability. Annuities are generally purchased for future income. During the accumulation period, liquidity could be a concern based on limited withdrawals, surrender charges and could incur a penalty before age 59 ½.
Long term guaranteed fixed interest rates, especially in a low interest rate environment, could be detrimental in a rising interest rate market where annuities could be difficult to move because of the liquidity items already mentioned.
Some annuities are tied to domestic and foreign indices, with a possibility of non crediting years because of poor indices performance. Some annuities use separate sub accounts which use market equities and bond investment vehicles that have exposure to volatility, i.e. you could lose all your money in the cash value account.
Knowing the disadvantages of all financial assets is a good idea, so good for you to check! All financial assets have their issues. The key to financial success is to determine which ones fit your financial situation the best and how to assemble an overall mix of assets that serves you best. Annuities often have a place in a portfolio even with their limitations.
You would think your question would be easy to answer. The true, but maybe not too satisfying answer is, it depends on how it is used. Annuities are a tool and when used well they can yield excellent results. If used poorly they can be hazardous to your financial health.
This is a deep topic so I will just list a few things to look out for to determine if an annuity is appropriate for you. I would advise you to ask your friends for a referral to a reputable insurance professional. And I would look to your CPA or tax advisor to advise you on the tax implications of owning an annuity. This is best done in a joint meeting of both the insurance professional and the tax advisor.
Are you under 59 and 1/2 and subject to the IRS 10% early withdrawal penalty
How liquid is the annuity? How long do the early withdrawal penalties work and how much will they let you take out annually without penalty? Can you afford to defer your gains and let them grow past the penalty periods?
Is there a market value adjustment cost in addition to the early withdrawal penalty?
How is the interest rate calculated? How long are current rates locked in? Will the credited interest rate go up with rising interest rates?
How financially strong is the insurance company you are looking at? Are you confident they will be able to deliver on their contractual promises? What are their independent ratings?
Annuities require ongoing attention. Are you willing to meet with your advisors periodically to manage them?
These and many other factors should be considered in determining if an annuity is appropriate for you. Competent professionals use annuities to provide safe income, growth and tax benefits. They are useful in many situations. Be mindful that they are only one of many tools a financial professional may use in helping their clients' meet their financial goals.
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Long term guaranteed fixed interest rates, especially in a low interest rate environment, could be detrimental in a rising interest rate market where annuities could be difficult to move because of the liquidity items already mentioned.
Some annuities are tied to domestic and foreign indices, with a possibility of non crediting years because of poor indices performance. Some annuities use separate sub accounts which use market equities and bond investment vehicles that have exposure to volatility, i.e. you could lose all your money in the cash value account.
You would think your question would be easy to answer. The true, but maybe not too satisfying answer is, it depends on how it is used. Annuities are a tool and when used well they can yield excellent results. If used poorly they can be hazardous to your financial health.
This is a deep topic so I will just list a few things to look out for to determine if an annuity is appropriate for you. I would advise you to ask your friends for a referral to a reputable insurance professional. And I would look to your CPA or tax advisor to advise you on the tax implications of owning an annuity. This is best done in a joint meeting of both the insurance professional and the tax advisor.
Are you under 59 and 1/2 and subject to the IRS 10% early withdrawal penalty
How liquid is the annuity? How long do the early withdrawal penalties work and how much will they let you take out annually without penalty? Can you afford to defer your gains and let them grow past the penalty periods?
Is there a market value adjustment cost in addition to the early withdrawal penalty?
How is the interest rate calculated? How long are current rates locked in? Will the credited interest rate go up with rising interest rates?
How financially strong is the insurance company you are looking at? Are you confident they will be able to deliver on their contractual promises? What are their independent ratings?
Annuities require ongoing attention. Are you willing to meet with your advisors periodically to manage them?
These and many other factors should be considered in determining if an annuity is appropriate for you. Competent professionals use annuities to provide safe income, growth and tax benefits. They are useful in many situations. Be mindful that they are only one of many tools a financial professional may use in helping their clients' meet their financial goals.