A lot of people wonder whether Index Annuities are a good investment. There are two answers “yes” and “no”. The point is that your specific situation determines if an IA is good for you.
Let’s start with the positives.
1. Safety of principal is a major benefit. When comparing an index annuity to a regular investment account like bonds, mutual funds, or stocks, index annuities are much safer as they do not fluctuate with the market. It means that no downs are possible, only ups.
2. Bonuses can enhance your ability to take income out for retirement. There are such IA companies that will add 5-15% to your annuity when you deposit funds with them. This is a great way to recover the earning power of investment losses.
3. Expenses work much differently. You should know that mutual funds and broker firms almost always have associated internal costs that take money from your return or lack of return each year. These can run from .25% all the way up to 3.5%. These extra fees severely drag your returns over time. IA’s have Caps instead of expenses. It must be also pointed out that these caps can restrict return somewhat but they can also be very helpful in volatile markets like right now. In the case that your mutual fund has a zero performance – minus the 1.5% internal fee of your fund then it means that your return for the year is negative 1.5%. Since there are no fees with the IA, the same zero percent return equals a zero percent and that is 1.5% better for the IA with the exact same return on investment for the year. There is also another scenario available – for example, your fund is down 25% and there is still a 1.5% internal fee for a total of a 26.5% loss for the year. It means that the IA would have a zero return and no expenses for a zero year or no loss but no gain either.
4. Rate of return is similar. In the case that the rate of return for the IA and the other investments are similar it would be a no brainer for most people. In most cases, they are very similar and this will vary with each annuity company. You will ask why? Generally speaking, the more successful the annuity company equals a better return. And the reason is that your money is not in the market. As you know, the insurance companies make their money by buying bonds, option trading, and many other strategies and they do mot risk your principal and pass on losses to you and that is the other type of annuity that is called a variable annuity. It is if the insurance company is more successful, they pay more out to their contract holders which equals more money in your pocket.
In conclusion, for retirement purposes the IA can be a great addition to help protect your assets and provide income. You should just make sure not to put all of your eggs in one basket or one investment product.
Let’s move on to the negatives.
1. You should try not to think of an annuity as monthly check and you losing access to your principal. That particular concept is rarely done anymore.
2. Keep in mind that annuities are not for short term money. You should be very careful if you need access to your money or interest payments in less than one year. You should be aware that most annuities carry high charges for with drawl in the first year.
3. You should learn how the interest is credited to your account.
4. You should understand how you take money out. Find out if you have to leave your money in for a certain amount of years. You should also know whether, is there a schedule that shows when you can take that money out in the case that you receive a bonus. Most have a 10% free with drawl option and it means that if you put in $250,000 – then $25,000 is free each year with no penalties. People would never take that much out of an investment in one year in a typical retirement plan so this works perfect for most of us.
All mentioned above are just a few of the positives and negatives of Index Annuities. Let’s remind once more that with an Index Annuity your money is not in the stock markets. In addition you should always be sure to see your Investment Advisor for appropriate allocations into any new investment and in the case your Investment Advisor does not understand this concept you should better find one that does.
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