What is an Annuity?
Simply put, an annuity is a contract between you and an insurance company that results in a steady income stream for you. You pay a lump sum or make regular contributions to fund the annuity, and the insurance company provides you with regular payments over a predetermined number of months or years.
Annuities have been around for hundreds of years, dating all the way back to ancient Rome. Back then, annuities were used to provide financial security for individuals and families. Today, annuities as a popular retirement savings tool, offering folks the security of a guaranteed income for life or a fixed period of time. By contributing to an annuity, you are essentially creating a financial safety net for yourself.
One of the biggest benefits of annuities is that they offer tax-deferred growth, which means that any earnings are not taxable until you start receiving payments. This can be extremely beneficial to those who are looking to maximize their retirement savings while minimizing their tax liability.
Types of Annuities
Did you know that there are several different types of annuities created to address a variety of financial needs and goals? Here’s an overview:
- Fixed annuities offer a locked-in interest rate, providing you with consistent income. With a fixed annuity, you can predict exactly how much you will receive with each payment, making it much easier to budget and plan for your retirement.
- Variable annuities allow you to invest in a more diverse range of funds, giving you the potential for higher returns… or bigger losses. With a variable annuity, your income is not fixed and can increase or decrease based on the performance of the underlying investments you choose. This can be appealing to individuals who are comfortable taking a walk on the wild side instead of playing it safe.
- Indexed annuities combine the features of fixed and variable annuities, offering a guaranteed minimum payment amount plus the chance to earn more based on the performance of a specific market index. This type of annuity is a great choice for those who want some level of dependable income but also want the opportunity to be rewarded if their investments perform well.
The type of annuity you choose should be a personal decision based on your individual financial situation, goals, and risk tolerance. We recommend that you consult with a trusted financial expert who can help you decide on the best annuity option for your needs.
Should I Invest in Annuities?
There are two sides to every important decision in life. Let’s break them down:
The Pro’s of Investing in Annuities
- Annuities provide a reliable income stream, especially important for those in retirement.
- Annuities offer tax-deferred growth, meaning you won't pay taxes on any earnings until you start receiving payouts.
- Some annuities come with a guarantee that you will receive payments regardless of market conditions.
The Cons of Investing in Annuities
- Annuities often include expensive fees that eat into your earnings.
- Annuities typically come with restrictions on accessing your funds, essentially locking you out of your own money for long periods of time.
- Fixed annuities may not stay on pace with inflation, potentially reducing your purchasing power over the long haul.
How to Determine if an Annuity is Safe
Is the annuity option you are considering a safe bet? Answering the following questions may help tell the tale.
Is the insurance company financially sound?
The financial strength and reputation of the insurance company is a crucial factor in determining the safety of an annuity. Companies with a strong financial position are more dependable in fulfilling their obligations to clients because they have the resources to withstand economic dips and market volatility, guaranteeing that annuity payments are made on time and in full.
One method of assessing the financial strength of an insurance company is to look at ratings provided by respected credit agencies like Standard & Poor's, Moody's or Fitch. These outlets rate the insurer's ability to meet their respective financial obligations, giving you a clear picture as to whether they can be trusted when things get rocky.
An insurer's overall reputation and track record over long periods of time is also a great indicator of trustworthiness. Companies with a long history of dependability in the annuity market is more likely to provide a safe and secure annuity.
What is the interest rate environment?
The current (or future) interest rate environment can certainly affect the safety of annuities. That’s because insurers typically invest the premiums they receive from annuity holders into other assets such as bonds, stocks, and real estate. When interest rates are down, the returns on these investments are also low, making it more challenging for insurers to meet their financial obligations.
On the other hand, elevated interest rates can be advantageous for annuity holders. As interest rates increase, insurers can earn higher investment returns, providing them with the funds they need to meet their obligations more easily and provide a greater level of security for annuity holders.
If you are worried about the unpredictability of interest rates over the long haul, don’t be. While the interest rate environment is a significant factor in your annuities’ safety, it's not the only thing to consider. Other factors, such as your insurance companies' financial strength and the specific terms and conditions of your annuity agreement, will also play important roles in ensuring your annuities’ stability.
The Bottom Line
So, are annuities safe? Now that you know more about your options, that’s for you to decide. Sure, there are risks involved, but if you choose wisely, annuities can indeed be a secure and dependable part of your investment portfolio.
Moving on From Annuities
Whether you are considering investing in annuities or already have one ore more of them, you don’t have to worry about being stuck with them forever. If you are currently in the beginning or middle of a long-term annuity arrangement and an unexpected life change causes you to need cash now, there’s a time-tested solution for you.
For over three decades, JG Wentworth has been helping customers get the money they need without waiting years for it. Every year, we work with Annuity holders to purchase some or all of their payments for a life-changing lump sum of cash, and we can do the same for you. If you receive Annuity or Structured Settlement payments and need cash now, give us a call at 855-688-9669 for a free, no-pressure quote today!