Risks Associated with Annuity Products

by High Yield Savings Accounts

As most individuals know, an annuity is a series of payments that are paid over an interval specified in a contract and whose value is determined by several different factors. Annuities are generally purchased through insurance companies; however, there are some investment companies who offer them. There are three primary types of annuities, fixed, indexed, and variable annuities, and each different form has its own advantages and disadvantages. Educating yourself about the various risks associated with investing in annuities will allow you to determine if this is the most advantageous method of investing for yourself.

Risks Associated with Annuity Products

One of the primary risks of annuities is that they are often subjected to the same volatility as mutual funds in regards to market conditions. In particular, variable annuities are much more subject to the fallout of these market conditions. Essentially, the yield that produce is not adjusted for increases in the annual cost of living or for inflation, unless it is specifically specified in one’s rider. Annuities with these riders are significantly more expensive. In essence, the draw that you would receive from an annuity today will not stretch as far in 20 years. In this arena, fixed annuities are much more inflexible than indexed or variable annuities.

The second most common risk that is associated with annuities is that of annuity death and survivorship risk. This risk is primarily applied to fixed annuities. For example, once the premium of an annuity has been surrendered, it is again unattainable, even if you were to die after only receiving two or three payments from the annuity. Essentially, your estate will not receive any money or settlement back from the insurance company. Another consideration is that with these fixed annuities, your survivors, such as a wife or children, will not receive any benefits from the annuity. In order to remedy this problem in regards to a spouse, a joint life annuity should be purchased as an alternative.

Another potential risk that must be taken into account is that of the annuity company’s failure risk. Annuities are not monitored or insured by the FDIC or any other governmental agency. If the insurance company that has issued your annuity fails, then you will also suffer the financial loss without any course for redress. The majority of states within the United States offer some form of insurance that will protect the investment you have made in your annuity; however, this insurance is expensive, and it also usually has monetary limits. For example, the monetary limit of this protection will be around $100,000.

When you are developing a risk control strategy to protect your annuity, it would be ideal for you to contact the insurance commissioner of your state to confirm the fact that your state has a guaranty association. Furthermore, you will need to make inquiries regarding the financial limits that would be applied to your particular annuity. Taking these monetary limits into consideration, it will also be possible for you to divide annuity protection amongst multiple insurance companies to maximize the amount of protection that is available.

Annuities provide a helpful source of income when an individual is developing their overall retirement plan. However, there is a certain amount of research and preparation you should perform before you begin investing in an annuity portfolio. All of the risks that are associated with fixed, variable, and indexed annuities must be carefully scrutinized to assess the risk associated with each one. Furthermore, you must consider that if the need for you to surrender your annuity early should arise, then there will be various fees and penalties associated with early withdrawals or insolvency.


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