Annuities - Are They Good For You or Only Your Financial Advisor?
Why? Because annuities typically pay handsome commissions to the salespeople. But does this mean that annuities are always bad? Given the right circumstances, fixed annuities and variable annuities could be the right financial vehicle for you.
What Are Annuities Anyway?
Annuities are life insurance products designed to provide supplemental income, mostly for retired people. The term "annuity" literally means "annual payment of allowance or income."
Basically, annuities tend to work like this: Someone pays a set monthly premium, as with life insurance, for so many years. Then, when he's done paying, he waits for a while. A few years later, he begins receiving monthly income.
The amount he is to receive, usually for the rest of his life, is generally much greater than the total amount of premiums he paid in.
Fixed Annuities – The Original Version
Fixed annuities work much like the example above. The key thing is that with fixed annuities, investors are guaranteed a set pay-out. Almost no other investment product guarantees anything, and that's why fixed annuities are actually a form of insurance, not securities.
The big problem with fixed annuities is inflation. While the money you pay in premiums is generally less than you're guaranteed to receive, when you adjust for inflation, you might be losing out. This is one of the reason annuities have gotten so much bad press recently.
Variable Annuities – New and Improved?
Variable annuities protect you against inflation risk by investing your premiums more aggressively. The downside? While variable annuities guarantee lifetime income, they do not guarantee how much that income might be. In fact, you could even lose money by investing in variable annuities.
For this reason, many of the more ethical financial advisors recommend that you buy a modest life insurance policy and invest the premiums you save into solid mutual funds.
To Be Fair – The Upside of Annuities
Theoretically, annuities could be a great investment vehicle. Rather than "throwing away" life insurance premiums, annuities can provide for a death benefit while simultaneously allowing your money to grow.
Also, when compared to mutual funds, annuities offer several advantages. For one, the money you invest grows tax deferred. This means that you will not be required to pay income tax on the funds invested into an annuity until you begin withdrawing money.
Secondly, variable annuities do guarantee lifetime income, while theoretically at least, you could lose all of your money invested into mutual funds.
In practice, this is unlikely, but at least with an annuity you will be able to plan for the worst case scenario of a guaranteed lifetime benefit. The worst case scenario for mutual funds is $0.
Mutual Funds and Variable Annuities – A Side-by-Side Comparison
Maximum sales load: Mutual fund, 8.5 percent; variable annuity, no maximum. This means that unethical brokers can charge unsuspecting clients any sales charge that they want.
Pricing: Mutual fund, net asset value (NAV) calculated once per day; variable annuity, unit value calculated once per day. Mutual funds have the major advantage of being liquid – you can buy or sell them any business day of the year. A variable annuity is a life insurance product and is not liquid at all.
Share value: Mutual fund, depends on performance of the fund; variable annuity, depends on the performance of the "separate account," in which a portion of premiums paid are invested.
Make Sure That Your Financial Advisor is Looking Out for Your Interests
If you feel that your financial advisor is more concerned with her own commission revenue than your financial well-being, head for the door and never look back.
Financial advisors are supposed to be professionals, not cheap salespeople. Like doctors and lawyers, their duty is to those whom they serve, not to the company that employs them or to their own paychecks.
Older individuals are especially susceptible to hotshot young brokers who think they can score a quick buck by unloading a junk product with a big commission.
Your best defense against this is to become as fully educated as you can about each investment product that's recommended to you, and to find a financial advisor with references from people you know you can trust.
A Few Questions to Ask Your Advisor
If you're ever dubious of a product your advisor is recommending, be sure to ask him how much commission he receives for selling it. Come right out and ask if he would recommend the product if the commission were half or one-third what it is.
Ask him what are some products that he recommends that do not provide such high commissions. And if you really want to rattle your advisor, ask him what score he received on the Series 7 exam. Ask him to show you his certificate proving his score.
Tell him that you're considering a variety of advisors, and these are the criteria you're using to determine which one is right for you. It's important that he remembers that you are his boss, and that he is to put your interests ahead of his own. That's what being a professional is all about.
Related Tags: annuities, fixed annuities, variable annuities
William Smith the author provides additional financial information on many subjects as well as the secret to his success in the market along with 5 Free power stock picks emailed daily so grab your Free subscription on his website at Stock Picks (All is Free) Your Article Search Directory : Find in Articles
Recent articles in this category:
- The Beginning of the Cataloging Code
The first significant cataloging code was published in 1841. The realization that cooperation and s - In the Lap of the Gods 24
Life moved on. Lily became well liked by both students and staff because of her cheerful outlook on - In the Lap of the Gods 23
Does fate decide the future? Is it all mapped out for us, predestined, or can we influence what com - Write Your Memoir: How to Write About What Troubles You the Most
Everyone has a story to tell, and unfortunately those stories aren't always pleasant. What makes me - How Crafty Word Order Can Instantly Improve Your Writing
by Philip Yaffe I am usually very reticent about offering writing tips. Unless they are linked to - You Say Grandpa, I Say Deda
I was born with two grandmothers but only one grandfather. In nature's rules of familial supply and - My Russian American Dichotomy
I was a Russian girl and an American teenager. I had no choice about the first but I tried very har - In the Lap of the Gods 22
This is just an explanation for those who have read some of the other Chapters of, "In the Lap of t - Write a Book: 8 Reasons You Should Do it
Studies have shown that 82% of people want to write a book, but few of these actually ever achieve - Book Review: the Book of Common Prayer
Book Review: The Book of Common Prayer, "My carry-with-me copy is this size, and I recommend it for
Most viewed articles in this category:
- Real Estate Investment - Investing In Commercial Properties
As in any other type of investment, its obviously advisable to do your research well so that the pro - Taking Care Of Acne Prone Skin With Proper Skin Care Products
Although acne has been largely associated with teeners and puberty, the condition is not only confin - Do I Really Need Eight Hours Of Sleep Each Night?
What if you were told that there is no definitive answer for why we need to sleep? Your initial reac - How to Improve Your FICO Credit Score
If you didn't know this already, having a good credit score is more important than having a lot of c - 10 Tips for a Magnificent Memory
"Where did I leave my keys?" "What did I come in here for?" "Your glasses are on top of your head!" - Things You Might Like To Know About Card Companies
If you have a regular income and are 18 or over then you may be able to get a credit card. You will - Bad Breath in Babies and Toddlers
If your baby or toddler has had bad breath lately, not to worry. There are plenty of things you can - Starving College Students No More
The majority of today's college students are extremely Internet savvy. In fact, many of those studen - Cosmetic Surgery Financing: How Can You Get It?
Cosmetic surgery, a branch of plastic surgery, can be quite expensive, especially if you are plannin - Article Marketing, Improve Your Ranking With Links
Article Marketing, without a doubt remains the best free formula for attracting website traffic. At