Do Your Homework Before You Buy an Annuity

If you are considering buying a deferred annuity for a long-term investment or an immediate annuity for income, be sure to do lots of research before you sign the dotted line. An annuity is a complicated contract between you and an insurance company that comes with a few benefits and many conditions and stipulations. An annuity is not a relatively simple investment like an individual stock or index mutual fund. Therefore, be sure that you understand what you are buying and how much all the benefits really cost you.

The principal selling features of a deferred annuity include: you can invest as much money as you want, your returns grow tax free until you make withdrawals and you can invest in stocks, bonds or money market funds. But for these features you pay many fees and charges that reduce the total return of your investment. For many deferred annuities it takes decades before your returns offset the hefty fees and charges that you pay.

Immediate annuities let you receive a fixed or variable income stream but high charges and fees can decrease your take. Be very careful with a variable annuity. Your returns vary directly with the returns of your investments and the fees for variable annuities are usually high.

An annuity is a good deal for the broker or agent who sells it, the insurance company who administers it and the investment advisors who manage your investments. Whether an annuity is a good deal for you is problematic.

To learn more about annuities see the Insurance Information Institute or AnnuityFYI.

Posted May 24, 2006.