Why are Annuities Popular
Older investors in particular are drawn to annuities. Annuities are popular among this group because they can provide a guaranteed income stream for life, along with a guarantee of principle. For older investors who don't have large retirement accounts, the threat of outliving their money is a significant risk. Annuities, especially those that provide guaranteed income, can provide a tremendous safety net.
Annuities are really the only investments that provide options for guaranteed income, a guaranteed return or a guarantee of the principle. Annuities have become popular because the options that are available now fit a wider portion of the populace. In the past, most people believed that annuities were only for wealthy individuals or families with a need to either shelter assets or ensure that large amounts of income would be guaranteed.
But, over the past several years, insurance companies have been able to successfully market annuity products to middle and lower class families who also need to ensure that income continues in retirement. This is especially true in the United States, as the life expectancy for both men and women has increased dramatically over the last 40 years.
One of the keys to the popularity of annuities is the strength of the insurance companies that sell them. Any investor considering an annuity should always make sure that the company from which he or she buys has very high ratings from each of the four credit rating agencies. A.M. Best, Fitch, Moody's Investor Service and Standard and Poor's each rate insurance companies on their ability to pay future financial obligations. As annuities represent a financial obligation that may not come due for many years, and then may continue for many years, investors need to make sure that the company will be able to make the appropriate payments.
Life insurance companies must meet certain capitalization requirements and must usually keep an amount on hand that equals the amount of the obligations. Because most insurance companies have been able to withstand economic downturns, annuities have become more popular.
Why are Annuities Popular for Those Who Seek Guaranteed Income?
Several life insurance companies sell annuity products that guarantee income for the life of the investor. The insurance company will typically invest in highly rated bonds such as US Treasuries and high-grade corporate bonds to generate the amount of income needed to pay the investor a guaranteed amount each month.
When an investor purchases an annuity that pays a guaranteed amount each month for life, he or she is effectively transferring the risk of outliving his or her money to the insurance company. When calculating the amount of money that will be paid out each month, the insurance company looks at the amount of the premium that is used to purchase the annuity and the life expectancy of the annuitant. Even if the annuitant lives past the time he or she collects an amount in payouts equal to the amount he or she paid in as the premium, the insurance company must continue the payouts for as long as he or she lives.
Are Annuities a Popular Choice Among Young Investors?
Annuities are often offered as part of an employer sponsored retirement account. Rather than purchasing the annuity with a single lump sum, the investor adds money to the account each month or pay period. This type of popular annuity is usually variable, meaning that its value will fluctuate with the underlying assets.
While a variable annuity can have a place in an older worker's retirement plan, annuities are not normally recommended for younger workers. The expenses associated with managing the annuity often outstrip the gains. While older workers may prefer the safety of the annuity, younger workers will typically need to take more risks in order to build up their accounts.
Younger investors are also more likely to be able to ride out market and economic turbulence better than older investors. Even if the markets lose a significant percentage over a period of several years, younger investors still have the benefit of compounding over a longer period of time.
Are Annuities More Popular During Economic Downturns?
Not surprisingly, the answer is yes. Investors who have lost significant wealth in the stock market often turn to annuities during economic downturns. Some of these investors are concerned that they have made the wrong decisions about individual stocks or mutual funds and want the added security of professional money managers who administer the investments within the annuity. Others are concerned that leaving their money in the market will result in further losses.
Life insurance companies have developed a number of new annuity products over the past several years that have enhanced their reputation of safety during turbulent economic times. This is a big reason why annuities are popular. For example, annuities with a cost of living adjustment (COLA) will ensure that the payouts increase each year in order to offset the effects of inflation. This is especially attractive to investors who fear a significant loss of purchasing power due to inflation. After all, next to outliving one's retirement assets, inflation is the next greatest threat to retirement savings.
Annuities have also become more popular because several insurance companies now offer options that allow all or a portion of the premium to be paid to a beneficiary. In the past, the part of the premium that was in the account at the time of the annuitant's death became the property of the insurance company. Annuity investors did not have the option of naming a beneficiary. A number of products now, however, allow the annuitant to name a beneficiary who will receive the remaining amount.
For example, one type of product guarantees that the difference between the amount of the initial premium and the amount that has been paid out will be provided to the beneficiary. If the annuity was purchased with a premium of $100,000 and only $50,000 has been paid out at the time of death, the remaining $50,000 will be given to the beneficiary.
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