Advantages and Disadvantages of Annuities

An annuity is a contract between the buyer and an insurance company. In general, the insurance company promises to do something with the buyer’s money -- like grow it or pay it out over a number of years. This page should serve as a general overview of annuities. After you understand the concept you can look into the various annuity types.

Advantages of Annuities

Annuities can be helpful in some situations. In general, some benefits are:

• Tax-deferred growth and compounding within the annuity contract
• Guaranteed rates of return on your dollars
• Guaranteed lifetime payments if you annuitize (in some cases you don’t even have to annuitize in order to receive this benefit)
• Other features that may be important to you. These are various bells and whistles that do very specific things

Note that the guarantees are only as strong as the insurance company that issued the annuity. In other words, if the insurance company fails, the promise is no good. You should mitigate this risk by using only the strongest insurance companies out there.

Disadvantages of Annuities

• You have to pay for the guarantees somehow. If you don’t need them, don’t pay for them
• Some contracts have surrender periods that can tie up your money longer than you want
• IRS rules restrict how you take money out of an annuity. Distributions may be taxable and/or penalized
• Annuities can be overused in banks

With this in mind, you can decide how an annuity would impact your finances. They’re right for some people, and wrong for others.