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What You Need To Know About Annuities

Subtitle: We’re Goin’ To Hawaii!!

What are Annuities? – An Annuity is an investment typically used for retirement. They are sold by institutions like insurance companies. They invest your money for you and in return pay a steady stream of income at a later point in your life.

What are Variable Annuities? – A Variable Annuity is an Annuity that pays you more if your investments in the Annuity do better. But it doesn’t pay as good if your investments in the Annuity do poorly.

Don’t Buy Variable Annuities

Why? Because they could provide your money manager with a free trip to Hawaii on you right from the get go (when you first fork over your cash).

Well, just to be fair, that’s not the only reason and it’s not the only investment that could do that.

There are different annuities (variable, fixed, etc.), but here’s the downside on variable annuities and they’re just not worth getting into. Besides being confusing as heck for some folks, sometimes the financial person trying to sell them doesn’t come right out and tell you they are annuities.

What the Sales People Do

Sales techniques include instilling fear in you about your retirement. This is a way annuities are sold to you. But to you, the sales person can make them sound magical. Besides, you’ll earn around 3% or more no matter what the market does or how the economy is. What’s not to like about that?

When they sell it to you, they say, “Well, you’re a long-term investor right? Those penalties only apply to people who take their money out like those day-traders, you’re not one of those people, right?”

Life Changes

You pick investments that meet your needs. Your life changes over time. You want to position yourself so that you can change your investment goals wants and needs, when your life changes, with very little penalties or fees.

A Variable Annuity Example

A variable annuity is just a family of mutual funds sold by an insurance company. Unfortunately, you’ll pay more out of your investment if it’s an annuity managed by an insurance company or an institution that get their take off profits before they get to you.

Mutual fund companies have fees around 1% a year which are for management expenses. For example, if the fund was up 11% for one year, your return would be 10%. This is for example purposes only.

With an annuity, the insurance company or institution that sold you the annuity has to slap another percent on top of that. Say around 2% a year.

The guarantees then are not what you think.

The Future Value of an Annuity

What they’ll do is, at the end of 10 years, you don’t get a lump sum payout, you get a payout over the next 10 years. So now you’re in for a 20 year investment with the annuity.

Once you agree to take the payout over 10 years for example, you stop getting growth on your investment. All you get is the percent promised during the previous 10 years.

What a Great Deal

If the insurance companies thought for one second that they were going to lose money over this deal, then they would not sell these at all.

They are a very good deal for the insurance companies.

Know that they use some typical sales techniques. They play on your emotions by making you feel insecure about your future and that they will secure it for you. Or they use fear as a driver too.

Don’t let emotions cloud your investment decisions.

To recap, variable annuities are a family of mutual funds you can invest in by an insurance company and other institutions. They can:

  1. Have the highest commissions and that’s why some of the financial folks sell ’em. (Trip to Hawaii part)
  2. You have a limited number of investment choices. There might be 20-30 funds in the annuity but there are tens of thousands of funds out there to choose from. What are the odds that the annuity has the best 20-30 funds to choose from?
  3. Fees and expenses can be very high. Over time could possibly be 20% right off the top of your earnings. (Trip to Hawaii part)
  4. Taxed as ordinary income – could be taxed much higher than investing in the same mutual funds outside of the annuity.
  5. If you take money out the first year it could be charged 7% or more.
  6. Surrender Penalties: Normally if you buy an investment you can sell it with very little fee. With variable annuities, the “Surrender Penalty” is anywhere from 5 to 15 years. In other words, the insurance company will charge you a very large penalty if you want to take your own money out.
  7. And a host of other rules and regulations. Just say ‘No’.

The solution to NOT participating in an annuity is to invest in mutual funds yourself that are going to work for you from the get go. Either directly at the fund’s website or in your online brokerage account.

Read what the government has to say about Variable Annuities too.

What do you think of annuities? Do you sell annuities? Has an annuity worked for you? Let everyone know in the comments.

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