Annuities are one of the kinds of investments you make to secure your life. It is lump sum money that you pay to an insurance company in return of annual or monthly payments. The option is open for anybody who wants to make this investment. However, most of the people use it in their old age as a supplementary form of income. While the plan is extremely beneficial because it keeps you in constant flow of money, there certain limitations. The major drawback is that annuities block a big part of your money. So, should you or should you not invest in annuities? Here is a brief discussion about the pros and cons.
Annuities give you a source of lifelong income. Once you invest in it, you don’t have to worry whether you receive returns or not. This is in sharp contrast with investing in shares or stock markets where you cannot gauge the money you receive as returns. So, annuities can be a solid fallback.
The second major benefit is that the principle amount that you invest is protected. You receive periodic income until you live and after your death, your heirs receive at least as much as the principle you invested. When you invest in real estate, for instance, the value of the home or land might depreciate depending on the development in those geographies. So, you could end up selling the asset at a loss and receive lesser money than your principle investment. The same applies to investment in the stock market as well. When you invest in annuities, you don’t have to take a loss.
Annuities can get you tax benefits if you invest in certain standard IRA funds. You don’t have to incur tax penalties on the lump sum payment and can roll over your money into an annuity plan. So, the tax you pay will only be on the income you receive on the down payment and not on the down payment itself.
One of the major cons is that your money is blocked. You have very limited flexibility. If you are forced to cancel and withdraw the investment, you get very poor returns.
Secondly, the income you receive depends on the plan you choose. If you are not careful while purchasing, you could end up with a policy that offers very poor returns. Additionally, the income that you draw from annuities might be taxable at the rate of your regular income, which means that you lose out on a significant bit of benefits.
You also need to consider inflation. If you have signed up for a plan that gives you a fixed income throughout, the income you receive depreciates in value if there is an increase in inflation. So, you need to be careful and choose a plan that offers inflation-adjustable income. According to this plan, the income that you draw from the annuities increases year on year. It helps you handle inflated rates in a much better manner. The one drawback of this plan is that you receive low income initially.
Annuities are a good option if you choose the right policy.