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Investing in Annuities – Why Annuities Are Popular Again

Investing in AnnuitiesDuring times when the stock market is booming few investors considered investing in annuities.  The 2008 and 2009 stock market crash and severe recession that followed caused many investors looking to reduce their investment risk to explore Investing in Annuities that offer more reliable rates of investment return.  Given the option of putting their money into low yielding savings accounts, unstable money markets, or overvalued treasury bonds, the reliable rates of investment return that annuities offer have increased the popularity of Investing in Annuities in recent years.

The renewed interest in Investing in Annuities is accelerating as tens of millions of “baby boomers” near retirement age and seek safer investments for their retirement years that provide decent investment returns.  While “buy and hold” was the stock market mantra for many decades, the lack of returns in the stock market over the past decade and stock market volatility have caused many nearing retirement age to consider more stabile and safer investments such as annuities, so there retirement money is there when they need it.

Investing in Annuities – Why You Need to Know About Annuities

An annuity is defined as a contract or agreement between the buyer of the annuity and the life insurance company that sells the annuity by which the buyer receives fixed payments on an investment in an annuity for a lifetime or for a specified number of years.  Capital gains within an annuity account are held tax-deferred until the money is withdrawn, at which time it is treated as regular taxable income.

There are two basic types of annuities, variable annuities and fixed annuities.  Variable annuities offer better rates of return than fixed annuities.  Variable annuities have rates of return that vary based upon the returns of the underlying investments that comprise the variable annuities, which include investments made by the insurance company that manages the variable annuity in investment sub-accounts.  The sub-accounts that provide value and investment returns to variable annuities can invest in a wide variety of investment vehicles, including stocks and bonds.  An investment in variable annuities can offer a guaranteed rate of return for an additional fee.  Fixed annuities offer smaller rates of return than variable annuities; however, the rates of return offered by fixed annuities are consistent and guaranteed.

The big downside to Investing in Annuities is that they can be more expensive than other investments due to the fees charged by life insurance companies that sell and manage annuities.  Annuity fees are approximately a full percent higher than stock market index fund fees and over a half percent higher than managed mutual fund fees, which can diminish investment returns over long periods of time.  This is the price that investors pay for stabile investment returns that annuities offer versus risking their investment capital in the stock market. 

A risk that must be considered when Investing in Annuities is what would happen to the annuity if the life insurance company responsible for paying the annuity payments goes bankrupt, which could result in a total loss of investment capital.  State governments throughout the United States require annuity insurance coverage of at least $100,000 to be maintained by life insurance companies that sell annuities, which would cover any losses up to the maximum amount of the coverage.  To properly protect investments in annuities, buyers of annuities should only invest up to the maximum that is insured by the life insurance company selling the annuity.  If additional annuity investment is desired, investors should spread their investments out over several annuities, each of which does not exceed the insured maximum.

Historically, the stock market has offered similar, or at times better, rates of return over the long run in comparison to the rates of return offered by annuities.  However, stock market investors must endure considerable volatility and accept the fact that past stock market performance that has been similar or better than annuities is not guaranteed to continue into the future.  For this reason, Investing in Annuities is for those who do not want to worry about their money in the stock market or do not have a long enough investment horizon to be able to make money in the stock market over a long period of time.

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