Pros and Cons of Annuities, Essay Example

The insurance industry has many pros and cons. Annuities — being insurance products themselves — are very much a part of that mixed bag.

The disadvantages of annuities are first that they are often sold by an insurance agent, who will then earn a commission — paid by you — on the policy you buy. Another problem is that if you pull your money out before a certain time (typically five to seven years after buying your policy) you will have to pay an expensive surrender charge. So annuities are not for people with limited incomes. They are really only for people who have other funds sufficiently large enough for them in the event of an emergency, such as medical care. This is why seniors should be especially careful buying annuities — they are the most likely demographic to incur those kinds of expenses. It is why young people (especially couples) should be careful too. Chances are, even if they are high earners, they will have expenses — “necessary” or not — and will suddenly need all the cash they can get. Finally, depending on the kind of annuity (variable payout or fixed), the buyer will have to pay an annual fee (basically a money-management fee, like for a managed mutual fund), that, taken over time, can and probably will be substantial. (This is a fact that insurance agents naturally tend to downplay to potential buyers of annuities.)

Annuities do have advantages — primarily tax-related. If you have enough money to make it worthwhile to engage in tax-saving strategies beyond a 401(k) or IRA, then buying an annuity will allow you to tax-defer as much income as you want. This is naturally attractive to high-earning seniors because as they approach retirement they often are at their peak earning years. That’s income they will need to shield from taxes if they can. (Some annuities also allow your beneficiary to continue to receive your benefits after your death, others don’t.) An affluent, healthy, fifty year-old CEO with a family should consider annuities. Others can hang up.