Is An Annuity An Investment Or An Insurance Policy?

Is An Annuity An Investment Or An Insurance Policy?

Anyone who is thinking about, or attempting to prepare for their retirement may consider whether or not they should buy an annuity. This is simply something that someone would purchase through a major insurance company and their purchase would guarantee that they would receive a certain monthly payment for the remainder of their lifetime. As with any investment, it can be the right decision under some circumstances and a wrong decision under other circumstances.

Why An Annuity Is Not Always The Right Choice

Buying an annuity under the wrong circumstances will certainly lead to regret. For this reason, it is very important that you find out if it could really work for you. In the past, many people just looked at an annuity as a way to buy a retirement plan and so they felt that everyone should do it. Because of this reason, many people simply went out and invested their entire retirement savings into an annuity.

In any other investment, most people would understand that putting all their money into one investment is a very risky proposition. It is no different when it comes to an annuity. Those who fail to fully understand their investment, find that there are many hidden fees that they are charged for that unexpectedly and significantly impact their overall savings. Others also find that their income drops as markets tumble.

These reasons led to many states changing the laws that regulate what percentage of annuities can be held in a single portfolio. This means that anyone considering this type of investment will have to look at what the limits are. In addition to those considerations, there's also the need to decide if this is an investment or a way to secure monthly cash flow.

To fully understand an annuity is to understand that it's not exactly an investment but more an insurance policy. This means they should only be bought for the guarantees that are available with the purchase.

The Right Reason For Buying An Annuity

Many people who have bought an annuity feel it is a good investment. But as stated earlier it is more an insurance policy than an investment. There are many types of investments such as stocks and mutual funds and others when someone wants a genuine investment. When someone purchases an annuity they are essentially paying the insurance company to manage the investments.

For many people, it really isn't that difficult to make low-risk investments themselves. It is for this reason, that many will find that putting their money elsewhere is a better choice. Even for those who don't want to invest themselves, they can choose to use money managers rather than the insurance company because their fees are lower than those for an annuity. Do annuities ever make sense?

The right and the only reason for buying an annuity is for its guarantees. The thing to understand is that while an income amount will be given based on the annuity that you purchase, it is only a calculation and doesn't guarantee that your monthly check will always be exactly the same. The income projections are based on an index or formula.

The Bottom Line

An annuity can be a reasonable purchase if you fully understand its guarantees and all of its potential charges. It is also necessary to understand that it is a purchase and an insurance policy more than an investment. There are a wide assortment of investments someone can make in order to earn interest and they include bonds, securities, stocks and other investments. An annuity would not be included among those.


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