What are Annuities? Annuities are insurance products sold by insurance companies. In short, annuities require investors to deposit a sum on money, and in return, the insurance company makes set payments to the investor over a period of time. The money invested typically earns interest or is invested, allowing the investor’s principal to grow over time. Annuities may be beneficial. For individuals interested in keeping a set budget, annuities provide a certainty of periodic payments that can allow for budgeting over a period of several years. Further, annuities may help investors avoid certain tax consequences. However, annuities often require you to “lock up” your funds for a period of time, with any early withdrawals being subject to steep penalties.
Types of Annuities. There are three different types of annuities offered by most financial advisors and insurance companies. Fixed annuities are set contracts where the investor deposits funds that earn a minimum amount of interest. In return, the investor gets fixed amount of payments over a period of time. Variable annuities allow different options, including the ability to invest the funds deposited into the annuity. Indexed annuities track a stock market index, such as the Dow Jones Industrial Average or S&P 500. Fixed and indexed annuities are regulated by state securities commissions, while variable annuities are regulated by the U.S. Securities and Exchange Commission.
Things to Consider Before Investing in Annuities. Annuities provide stability and reliability in an investment. Investors receive payouts and annuities are often portrayed as “safer” investments. However, there are still significant risks and hidden costs associated with annuities. Typically, the insurance company receives a yearly payment based on the amount invested in an annuity. The terms of payment are often hidden deep in the terms and are not intuitive. Individuals who may have large expenses on the horizon should consider the penalties associated with withdrawing money before the term of the annuity expires. Annuities prior to the 2008 financial crisis were often more beneficial to consumers, whereas products today offer a lower rate of return and increased fees to minimize risk.
Why Were Annuities Recommended to Me? Financial advisors often recommend purchasing annuities because of the high commissions associated with selling annuities to investors. In doing so, financial advisors may not fully assess whether an annuity is suitable. Investors who subsequently face adverse consequences of investing in annuities may be able to recover costs from their financial advisor. If you have questions regarding annuities you’ve purchased, contact Devin Bone today to discuss your potential remedies. For a free consultation, call Devin at 248-782-7755 or complete our online contact form to set up a consultation.