Although annuities and investments are not the same things, there are important differences and similarities between them:
Other than variable annuities, 100% of the principal and the growth of an annuity is guaranteed, no matter what. Even when the stock market was down 40% in 2007 and 35% in 2020, annuity contracts were protected and no principal was lost. With variable annuities, the policyowner does assume market risk, making them very different tools. What follows is a discussion of some of the pros and cons of annuities versus investments.
Annuities create GUARANTEED, INCOME FOR LIFE. Using the right annuities can create unbeatable amounts guaranteed, future income that will be greater than any other strategy. For this reason, many people describe annuities as private pension plans.
Annuities are contracts with some of the strongest guarantors in the world. Investments are typically not contracts with guarantees.
All the money in an annuity is guaranteed, including all gains it earns from the day it is purchased. Everything in an annuity contract is regulated and spelled out, providing the most transparency. This creates safety, security and predictable outcomes. This is quite different from investments, such as real estate or equities in the stock market, which are good examples of speculation and risk. One is not better or worse than the other. They all have their places in a comprehensive financial plan. Annuities are precise, transparent and dependable. Most of our clients have annuities and investments.
Tax Deferral: Not paying tax during the annuity’s growth phase can be very meaningful. Taxes will ultimately be paid on distributions. Annuities are not tax shelters but the advantages of tax deferral is significant, especially for retirement purposes.
Rather than exposing inherited assets to loss, mismanagement and other risks, annuities are often used to create lifetime income for beneficiaries. Grandparents are increasingly using annuities to create sheltered income for children and grandchildren. Structured properly, the income is protected and safe from divorce and probate.
Unlike investments, some annuity companies offer generous bonuses to new policyholders. They do this by crediting the incoming account value with as much as 10%. Many people consider the bonus as an offset to surrender charges. The bonuses are added to the annuity’s account value and begin earning interest from day one.
Most annuities have NO FEES and there is NO COMMISSION paid from your assets. The one time commission is paid from the insurance company, NOT YOUR ASSETS. For example, when you pay a single premium of $200,000 into an annuity, the amount earning interest from day one is $200,000 plus the bonus if there is one. In comparison, a 1% fee for the same $200,000 investment is reducing the account value each year, by $2000. At the end of 10 years, it adds up to $20,000. If that fee taken from your account is 1.5%, then you will pay $30,000 over 10 years.
For people under age 59.5, there is a small penalty for withdrawing money from their annuity. Investments are not subject to these types of penalties.
Some annuities and some investments have surrender penalties. CDs are examples of investments with surrender penalties. Annuities have small, declining surrender penalties to allow insurance companies to invest your money with longer durations and better returns.
For a quote, please call us at 561-771-4647 or email Ted Bernstein, about a complimentary phone consultation.
Also published on Medium.