Annuities Pros and Cons

In finance, the word annuities is used to refer to the income generated from capital investment, which is paid in parts over a period of time. Annuities are important tools of retirement planning, wherein the a person invests a said amount of money in a company at a particular point of time, and gets monthly returns for the same, for the rest of his life. After the individual clears the premiums, which are either paid in full or in series of installments, the company makes payments to the person for a slated period of time. Understanding annuity and its types is essential before we move on to annuities pros and cons. Read on to know how does an annuity work.

Types of Annuities
There are various types of annuities, classified, depending on where assets are invested when annuity payments begin, and method of premium payment. Each of these annuities have various benefits. For instance, fixed annuities assure a specified rate of interest for a certain period of time, while variable annuities offer a greater opportunity for growth, but then, the risk involved is also high. Other prominent types of annuities are indexed annuities, immediate annuities, deferred annuities, single premium annuities, flexible premium annuities, etc. In order to get more information on annuities you can read more on annuities explained.

Annuity - Pros and Cons of Annuities Explained
Annuity is one of the best ways to ensure a quality future, but just like other financial tools, annuities too, have their own pros and cons. Not many people are aware of pros and cons of annuities. More importantly, when it comes to product marketing, the agent selling annuities stress only on the positives, and ignore the negative aspects of the product. Below mentioned are some of the important annuities pros and cons.

Benefits of Annuities
When it comes to retirement planning, annuities are preferred by many people because they offer significant benefits over the other retirement tools. Here are a few of these benefits.

• An immediate lifetime annuity contract, can ensure you guaranteed periodic payments for the whole life.
• It's a dependable option for those who don't want to take the risks where there are chances of losing a part of the savings.
• They have the capacity to replace employer sponsored pensions as reliable retirement tools.
• It's a steady source of income for people, who feel their resources may get exhausted over the time.
• A major benefit of annuities is that they allow investments to grow tax free.
• More importantly, there is no restriction bar for investment. Anybody can contribute on their will.
• Annuities can be customized to suit your requirements, and hence make your pockets inflation resistant.
• Annuities are actually life insurance contracts, which means probate can be avoided when beneficiaries are declared.
• The sum value of annuity is guaranteed to be at par or above the value of invested amount.
• Lastly, annuities are backed by the state guarantee funds, and therefore even if the company cannot pay, investments are not lost.

Disadvantages of Annuities
Not everything is pleasant about annuities, they have their own drawbacks as well. Here are a few of them.

• Annuities are regarded as less flexible retirement tools when compared to other options in the market as they tend to trap the lump sum of money.
• Annuities, which are meant to provide a steady income over a period of time, tend to be of no use when it comes to sudden expenses, involving a high amount.
• It either requires a large initial investment or multiple smaller investments over a period of time as the premiums.
• Though safe investment, a fixed annuity doesn't facilitate sudden gains like the stock market.
• Funds which are withdrawn early are subject to a tax penalty of up to 10 percent.
• It requires payment of additional fee in the form of sales charges and surrender charges.
• At times, it becomes difficult to make out which is a good annuity and which is a bad one.
• In order to work, an annuity requires a long time span and a significant amount of investment.

For knowledge and future reference you could read more on pros and cons of variable annuity too.

Aforementioned annuities pros and cons are some of the most prominent benefits and drawbacks from a long list. You need to put in some efforts to make sure that you get the best possible deal, while buying an annuity. Although going through the fine print can be a tiresome task, it's of utmost importance and hence shouldn't be avoided. Make sure that you deal with a trustworthy financial adviser. Being aware about the various annuities pros and cons can help you to avoid a financial disaster to a great extent.