Why even consider buying an annuity? An annuity is not for everyone but in special circumstances it makes sense. Deciding if an annuity is right for you is like trying to decide which cookie to buy in a bakery, first you have to decide if you even want a cookie, then which kind. Four possible reasons you may want to consider an annuity:
(1) You want to protect your principal
(2) You want to be assured that you will not outlive your money
(3) You understand how an annuity may fit in your overall investment portfolio, similar to a bond in that it pays a fixed rate of return.
(4) There is a particular rider that will help you accomplish a protection goal
An annuity will protect your principal as long as you abide by your part of the agreement and hold the funds in the account through the surrender period.
When you are ready to start receiving an income stream, usually at retirement, you can start receiving a life-time income based on your life expectancy. This process, annuitization, guarantees that you do not outlive your income.
A fixed annuity pays a guaranteed rate of return. This will act like the fixed income of your portfolio. An indexed annuity can provide the possibility of a higher rate of return than a fixed annuity but the trade-off is that there may not be a guaranteed rate. However, in either case, fixed or indexed, the principal is protected. Be wary of variable-annuity, as the name implies, the return will vary and can be negative. A variable-annuity is considered a ‘security’ and you can lose the principal.
Riders can provide additional benefits for additional costs. There are several types of riders that can protect your overall goals. Be sure to read the details and be aware of the costs.
Annuities are not for everyone, but, for the right purpose at the right time of your life an annuity can help you protect and/or accomplish your goals.