For some reason, annuities are touted as a “valid part” of a well-rounded investment plan for seniors. However, this is about as valid for investing as sugar cereals are healthy for a healthy diet. In other words, annuities should be avoided in order to maximize your returns on your investments. Anyone who tells you differently is trying to sell you something. To be fair, however, I will explain what they are and why they are used before getting into why you should not use them.
According to Wikipedia, “An annuity contract is created when an individual gives a life insurance company money which may grow on a tax-deferred basis and can then be distributed back to the owner in several ways. The defining characteristic of all annuity contracts is the option for a guaranteed distribution of income until the death of the person or persons named in the contract. However, the majority of modern annuity customers use annuities only to accumulate funds and to take lump-sum withdrawals without using the guaranteed-income-for-life feature.”
Put simply, annuities are the investment portion of a whole life insurance policy. You either put in all your money at once, and choose to receive the payouts immediately, or you can pay into the annuity with installments and receive the payouts at a later date. The payouts are based on how the market performs, up until a 12% interest rate of return. You don’t lose money, but you also don’t receive much gain either.
Why They Are Used
People use annuities because they are promoted as a way to protect investments in an “uncertain market”. Annuities and life insurance provides death benefits, but they each have a different purpose. While life insurance provides a benefit if the insured dies early, annuities provide benefits if the insured dies late. Meaning if you were to outlive your retirement money. They are also used for protecting your investments, so you have money to live on when you are retired.
That was the good part…now here is the part they don’t tell you. Annuities are designed to rip you off! How can I make such a bold statement? First off, think about who is selling your annuity to you–it’s not the investment brokers, but the insurance sales representatives. They are not even licensed by the Securities Exchange Commission (SEC) to sell you the annuity. How they can get away with it is because it is classified as an insurance product, rather than an investment product. Which means that they can get away with more than an investment broker could.
It’s Not Your Money
One thing that people are not aware of is that when they hand over their money to the insurance company to “buy” an annuity, they are giving up their rights to the money. “Wait a minute–are you telling me that the money I have is not mine anymore?” That’s exactly right–even though they tell you that you are “protecting” your money. So where does it go and who has control of it? If you guessed the insurance company, you’re right. They will take that money and invest it in the stock market just like anyone else could, and then pay you the dividends. However, the gotcha on this is that when you die, they are not obligated to give that money back to your survivors.
Your Bottom Line
It’s your money and your future that you are planning for. Don’t let it go down the drain just because some slick sales rep decides give you a slick presentation. Research your options before you sign on that dotted line and save yourself the headaches later on.