When buying an annuity, keep in mind the person you are purchasing it from sells them for a living. Annuities have many benefits; however, sellers will neglect to mention or gloss over in negatives aspects in order to make a sale. Buyers should know the basics of annuity fees before purchasing an annuity. Areas of particular concern should be charges to their deposits, fees for withdrawal, threat of inflation.
Load Charges
The largest things to overlook are the charges that an insurance company will impose on ones annuity. Charges are normally weighted as one starts the annuity, or evened out as the annuity matures. Charges called a ‘load’ are, “…deducted from each premium before any interest is added”, and greatly benefit the insurance company.
Loads accomplish two things for the insurance company. Firstly, it gives the company a certain profit, even before the money is reinvested during ones pay period. Second, it reduces the amount of principal in your account that is compounded. This, in turn, reduces the overall amount an annuity is worth when it matures.
Formidable Surrender Charges
The money, while yours, cannot be withdrawn after being put into the annuity freely. If one does, it will be at the expense of formidable surrender charges. An annuity should only be taken if one is certain that they can do without that money until the annuity matures fully. Otherwise it is a poor investment choice.
Annuity Risk and Benefits
One of the best annuity benefits is that annuities are tax-deferred growth of earnings. While this is true, an annuity offers more risk than a 401(k) or an IRA that one can get through their employers and an insurance company. Annuities should only be used as a tax-deferent if one has already invested as much as they desire in these other options.
Lastly, keep an eye on the market. If the market takes a bad turn and inflation rises, the fixed dollar payouts of your annuity will become less valuable, and eventually not enough to ensure comfortable living when retired.
By – Domenic Gabriella for RetirementSecurity.com