12 May What is an Annuity and the Top Mistakes to Avoid
Let’s face it, buying an annuity from an insurance company is very complicated. We agree on this point 100%. We also agree that for every one good annuity, there are probably 100 bad ones. The good news is that there are several reasons you should consider an annuity. This article will explain why this is and will also provide insights into what to avoid when purchasing one.
A big misconception in the financial industry is that annuities are bad. True, there are a lot of bad annuities however, there are also a handful of great annuities. The right annuities can be used for two specific reasons: retirement income and wealth building.
Annuities used for retirement income are designed to provide you (and/or your spouse) with a guaranteed paycheck for life. The insurance company can start paying you income right away (known as an immediate annuity) or at a later day (called a deferred annuity). The key is to do your homework because income annuities are not a one-size-fits-all solution. Depending on your income goals and when you want income payments to begin, there are at least half of dozen factors to consider.
Most individuals love the concept of an annuity, because who doesn’t want income payments guaranteed for life. However, there is another side to annuities that most are not familiar with which is using annuities for wealth building. Here is how the wealth building strategy works. There are annuities specifically designed to protect your money from stock market losses while allowing you to participate in stock market gains. With wealth building annuities, when the stock market goes up your annuity can increase in value and when the stock market crashes, you won’t lose any money.
We’ve been in the business a long time and here are some of the common mistakes most people make when purchasing an annuity:
- Not clearly understanding the product being bought happens very frequently. When this occurs, the annuity purchase may benefit the agent or advisor selling it more than benefiting you.
- Another major mistake is working with an agent or financial advisor who represents a limited number of insurance carriers. These sellers do not have the independent ability to scan the markets for the best available products for your specific needs.
- Lastly, buying an annuity that does not align with your goals and objectives is a mistake that gives annuities a bad reputation. As mentioned above, there are only two specific smart uses for annuities: as a retirement income stream or wealth building strategy. Annuity products are complicated and vary widely so purchasing one that does not align with your overall goals can be costly.
So, are annuities bad? Yes and no, and it depends on the type of annuity you’re buying and who is selling it to you. If designed the right way, annuities can be a very valuable tool in your investment or retirement portfolio. If you find annuities to be confusing and have questions, or if you can see how they might be used to help you reach your goals, please reach out to us.