Annuity FYI

Much has been written on annuities over the last couple of decades, yet they remain largely misunderstood by most people and, even some financial planners.  Between the promotion hyperbole of annuity sellers and the unconstructive criticism of some celebrity financial pundits, the available information on annuities presents a muddled picture at best leaving most people with more questions than answers as to what annuities are and their value as a retirement planning vehicle. 

Sometimes it takes a simple FYI approach to laying out some of the key pieces of information in order to break through the confusion, debunk myths, and clarify the known facts so that something can be clearly understood.  Herewith is your annuity FYI:

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World’s Most Enduring Investment Vehicle

The use of annuities dates back to early Roman times when the government authority issued “annuus” as a way to raise capital and provide citizens and soldiers with an annual stipend as a repayment.  Although bonds or debt instruments may predate annuities, many governments, such as England and France, discontinued their use in favor of annuities. Many of ancient wars were financed with money raised from annuities as were many of the more recognizable buildings and monuments built throughout Europe.

Best Safety Track Record of all Financial Instruments.

During the Great Depression, as banks were failing left and right, life insurance companies stepped up to provide the stability that investors desperately sought.  In fact, it was the life insurance companies that people, industry and government came to rely upon to provide the much need capital to expand business that, ultimately,  contribute to the war effort.  Prior to that period, and ever since, there has not been one instance of an annuity policyholder losing one dime. 

Only Means by Which Individuals Can Secure a Lifetime Income

  To clarify, an annuity will provide a guaranteed income for a long as the annuitant lives even if life expectancy is surpassed.  As the risk of outliving one’s income sources becomes more of a concern, the guaranteed income feature of an annuity takes on a whole new significance for worried retirees.

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Contracts with Flexibility

It’s the best of both worlds for annuity owners.  The annuity contract binds the life insurer to its obligations to pay a fixed return, guarantee principal and guarantee a stream of income for life. In return, the life insurer asks for a long term commitment of funds, yet, the contract still allows for withdrawals at anytime subject to surrender fees in the early years of the contract.  If an annuity owner becomes dissatisfied with an annuity, the cash values can be transferred, without tax consequences to another annuity provider, again, subject to surrender fees if the transfer occurs early in the contract. 

Money if You Die

One of the critisicms cast on annuities is based on the assumption that, once you begin to draw income and then you die, the insurance company will keep the remaining balance.  While this is true, it doesn’t have to work that way. Most annuity contracts include settlement options that provide for a cash refund of the balance or continued payments to beneficiaries in the event the annuitant dies.

Avoid Probate

As a contract, with named beneficiaries, the proceeds of the annuity death benefits are passed directly, outside of probate proceedings which can be costly and time consuming.

Provide Protection From Creditors

This is true in some states where exemptions apply to annuity income payments or cash values.  In other states, the exemption may be limited which means only a portion of the income or cash values is protected.   There are a handful of states that don’t have exemptions for annuity income that would protect it from creditors. 

Annuities Can be Expensive

There a several fees and expenses associated with annuity investments that aren’t found in other types of investments.  Because annuities are, in essence, an insurance policy, there are insurance costs. Also, variable annuities have the added expense of investment management fees and many are sold with a sales charge.  All of this can add up which is another one of their criticisms. 

There are hundreds of annuity product offerings with expenses and charges that range from high to very low and they can all be easily compared.  As with anything, the expenses of a purchase need to be weighed against the total benefits that it provides.  If an annuity with competitive expenses can be found, the benefits are most likely going to outweigh them in a short period of time.


While there may not have been anything earth-shattering presented here, they are just the facts and you can judge how interesting they are.  But, for anyone who is considering an annuity as a way to diversify their retirement investment portfolio, it is important, and perhaps even refreshing to just get the straight annuity FYI.

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