Why people buy fixed annuitiesArticle added by Jason Kestler on May 17, 2011
Ranked: #29 (1,269 pts)
This article explains some of the top reasons clients are drawn to fixed indexed annuities: safety, growth potential, tax advantages, lifetime income, liquidity and estate advantages.
What makes fixed and fixed indexed annuities so popular?
They offer a unique and attractive blend of safety, growth potential, tax advantages, lifetime income, liquidity and estate advantages.
The top priority for most people when they are saving their money, without question, is safety. No one puts their money in a place where they expect to lose it. They put their money in a place where they expect to get it back one day, hopefully with some nice growth. The great thing about fixed annuities is that they uniquely offer three levels of protection.
No. 1: By contract, a fixed annuity guarantees that your principal is protected and that you can get it back again, as long as you avoid any penalties for early withdrawal.
So, with these three levels of protection, fixed annuities offer excellent safety.
No. 2: Even if your insurance company fails, the value of your annuity (up to $100,000, or more in many states) is guaranteed by your state insurance guaranty fund.
No. 3: If you have a problem with the insurance company that issued your annuity and you want to get a regulator involved, no matter where that insurance company is located, the regulator is located in your home state.
Once people are satisfied that their money is safe, the next objective is to have that money grow as fast as possible. Many carriers offer annuities with very attractive rates of interest. And, the annuity industry invented indexed annuities precisely so they could offer even better rates of interest under certain conditions.
People want their money to grow as fast as possible, and besides having a high rate of growth, having some sort of tax advantage helps to accomplish that goal. Annuities have a tax advantage, and that is better than no tax advantage. Some people buy annuities for their tax deferral.
Annuities typically offer a variety of options to pay the value of the contract out over time as a guaranteed periodic amount of income. In fact, the dictionary definition of an annuity is often something like “a contract providing for an amount payable yearly or at other regular intervals.” Payment options often include income that is guaranteed to continue for the rest of your life, no matter how long you live. Thus, fixed annuities can help protect you from the risk of running out of money later in life.
Most people recognize that liquidity, safety and growth do not co-exist very well. For example, with a checking account, you get excellent safety and total liquidity, but most checking accounts pay little or no interest. With stock market mutual funds, you get good liquidity and hopefully a good rate of growth, but you are sacrificing some safety.
So, if an annuity is going to give you guarantees of safety and the potential for a good rate of growth, there needs to be some sacrifice in liquidity. The good news is most annuity products build in enough liquidity options to make many customers comfortable. Even retirees who need to withdraw money every year to supplement their incomes can find annuities that allow them to take such withdrawals.
At some point in their lives, many people become motivated to consider what will happen to their money after their death. An estate advantage offered by annuities is speed. With an annuity, you get to name a beneficiary and typically avoid the probate process, so an annuity can be the quickest way to get money to a beneficiary after your death.
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