Annuities
Annuities have become increasingly popular retirement products for America's graying population. While annuities can be sound investments as part of your overall financial portfolio, the products are sometimes unsuitable for certain investors.
Indeed, many investors become victims of high-pressure sales tactics that some annuity sellers use to scare or confuse people into buying an annuity. Instead of protection, many people, especially elderly investors, have seen their life savings vanish.
An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.
Annuities can be purchased through insurance agents, financial planners, banks and life insurance carriers. However, only life insurance companies issue policies.
Annuities typically offer tax-deferred growth of earnings and may include a death benefit that pays the annuity holder's beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, once withdrawals are taken from the annuity gains are taxed at ordinary income rates, and not capital gains rates.
There are generally three types of annuities – fixed, indexed, and variable. Variable annuities are securities regulated by the Securities and Exchange Commission (SEC). An indexed annuity may or may not be a security; however, most indexed annuities are not registered with the SEC. Fixed annuities are not securities and are not regulated by the SEC.
Over the past year, the Financial Industry Regulatory Authority and the SEC have issued several Investor Alerts on annuities and the unique issues – including their complexity (in some cases, a 150-plus page prospectus), high commissions and fees and other hidden traps – they possess.
One of those hidden traps: huge surrender charges. For example, most variable annuities assess surrender charges for withdrawals within a specified period, and that time period can be as long as six to eight years. Early withdrawals can translate into fees as high as 12 percent. Steep surrender charges also can be an indication of a high commission being paid to the agent/broker.
The bottom line: Annuities can be good retirement vehicles for certain investors depending on their financial situation, risk tolerance and investment objectives.