When planning for the future, it is important to consider a wide range of investment products. One particular investment product that gets a great deal of attention is an annuity. If you are considering an annuity, here is what you need to know.
What Is an Annuity?
Financial institutions, such as banks and insurance companies, offer annuities. An annuity functions as a contract that requires a financial institution to pay you a certain amount of income. You have the option of buying an annuity with one lump sum payment. You can also make multiple payments over a period of time.
Why Should You Consider an Annuity?
There are many advantages to purchasing an annuity. For instance, you have the option of adding as much as you want to your retirement. Annuities are not limited by financial restrictions like some other investment products.
Another advantage of an annuity is that most offer some level of protection. Depending on the financial institution you choose, the principal amount of your investment can potentially be guaranteed. Regardless of what happens, you could receive at least the amount of money that you put into the annuity.
Annuities also offer protection from inflation. With inflation protection, the amount that you would receive from the payouts would be on par with the cost of living at that time. Without this protection, your assets could be greatly impacted.
Why Should You Avoid an Annuity?
Although there are many advantages to having an annuity, there are some disadvantages to consider. One of the biggest issues is that there is very little flexibility with an annuity. If you need quick access to the funds invested in the annuity, you could run into problems. Once you purchase the annuity, your money is considered to be tied up in that investment.
Another issue is related to the type of annuity you select. Some annuities are more expensive than others and offer very little return. To avoid running into problems with the annuity, it is important that you carefully review the investment and its terms.
A final disadvantage to consider is that when you purchase an annuity, you lock in the current interest rate. If the interest rate is particularly low, you could lose out if the rates increase over time.
If you are still unsure whether or not an annuity is right for you, consider consulting with a financial adviser. He or she can help review your financial situation and determine what is the best step for you.