advantages of annuities, as well as disadvantages- post on

Advantages and Disadvantages of Annuities

Like everything in life, there are advantages and disadvantages of annuities. These are explained in complete detail in our “2018 Annuity Guide,” but the following is a brief list of some of the advantages of annuities, as well as some drawbacks:

Advantages of Annuities

    • Tax-Deferred Accumulation (this is a huge advantage over bank CD and money market investing, because it means greater profits to investors due to the accumulation of interest. Every investment becomes taxable upon withdrawal, with the exception of Roth IRA’s, but unfortunately there are contribution limits to Roth IRA’s. Tax-deferral is a very important element to consider when choosing an investment vehicle, because if you are accumulating interest tax-deferred (as with an annuity), your premium(s) earn interest, your interest earns interest, and the money you would have paid in taxes earns interest. 

  • By-Pass Probate– Most investments, including CD’s, money market investments, stocks and mutual funds, will pass through the probate process upon the policyholder’s death (unless a will or trust has been set up by a professional).  This is important because the probate process can be quite lengthy, usually tying up the assets for 6 months-1 year, and incurring costs along the way.  Annuities automatically by-pass the probate process because they have the beneficiary named/designated on the annuity contract upon purchase (and beneficiaries can be changed later, if need be), which means that the beneficiary (s) will get the policy values almost immediately, without excess probate expenditure.
  • Are the Only Investment that is Not Included in Interest Income for Social Security Taxation Purposes- That’s right, this one is a big advantage. Most investment types (including income from mortgages, pension, ½ of Social Security, CD’s, money markets, savings, stock/mutual fund dividends, capital gains, U.S. Treasury Bill(s), annuity withdrawals (only when interest from an annuity is withdrawn), and mutual fund interest) are included in the total income calculation used by the federal government for the purposes of figuring out the taxation rate of your Social Security benefits.
  • Are “Bulletproof.” What this means is that annuities are untouchable by everyone except for the policyholder, including the federal government and those persons who may attach liens against property or investments for finances owed. This is why a good number of business owners own annuities, because if the business was to collapse and declare bankruptcy or be subject to a lien, the annuity’s policy values could not be taken.
  • Offer Competitive Interest Rates– While there is a variety of annuity types and an even greater variety of interest rates being offered, fixed annuities offer better rates than other investment types that also offer a principal guarantee.

Disadvantages of Annuities

  • May Not Offer the Same Potential of Earning Higher Interest, Like a Mutual Fund. Again, this depends upon which mutual fund, and which equity-indexed annuity you are questioning. Generally speaking, EIA’s are limited in that you cannot earn returns of 15%, as in a mutual fund’s potential returns; most EIA’s have caps of 6% – 12%. However, you are exchanging safety of your principal investment for the potential of earning higher interest (what could be possible with a mutual fund).
  • Sometimes Have Surrender Charges (for Withdrawing Funds Earlier than the Term Specified). Most annuities have what is known as “surrender charges.” Surrender charges come into play when the investor takes his/her full investment out of the annuity before the specified term is up. Generally speaking, surrender charges decrease the longer you have an annuity. Despite this disadvantage, annuity holders are able to access a portion of their funds each year, usually 10%, without penalties. Many of these annuities also have loan privileges for greater accessibility.

To learn more about fixed annuities, equity-indexed annuities, and lifetime income options, as well as how to receive the best rates and bonuses being offered right now in Michigan, please call (810) 877-2400 or REQUEST YOUR FREE 2018 ANNUITY GUIDE and a complimentary financial analysis.

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