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There is considerable discussion about whether you should consider annuities good or bad. The short answer is that it depends. You’ll need to go a little further to really answer the answer to the question: are annuities good or bad?

What the Experts Say:

If you do any reading about annuities online, you’re likely to find many articles that criticize annuities. The criticism tends to focus on high fees and low returns. Some financial websites like The Motley Fool come right out and scorn annuities as investments, but even they must admit that, in some circumstances, certain kinds of annuities have a place in an investor’s retirement portfolio. The reason for this is that a lifetime income annuity will help you to ensure that your retirement savings will not run out during your lifetime.

The critics at Motley Fool categorize the different varieties of annuity plans as “sometimes good,” “bad,” and “ugly.” In their opinion, equity indexed annuities are the worst, variable annuities are bad, and lifetime income annuities are “sometimes good.” The opinions of financial professionals about these plans vary greatly, however. They recognize that each investor’s situation is different; what is a “bad” plan for one individual may be the perfect solution for another. That said, let’s focus on lifetime income annuities.

Lifetime Income Annuities:

Annuities don’t come anymore basic than lifetime income annuities. With the lifetime annuity contract, you pay a lump sum to an insurer in exchange for receiving a specified amount of income on a regular basis until you die. These plans do not offer the potentially high returns of investments like stocks and bonds, but a good lifetime income annuity plan provides a cost-effective way for you to not outlive your money. These plans are appropriate for individuals who are close to retirement and who don’t have as much in their retirement savings accounts as they would like. The plans are also suitable if you don’t want to deal with a financial advisor when managing your investments in retirement.

Do Your Financial Homework:

Annuities are frequently sold as the best retirement products on the market. Conversely, they are criticized as being the worst possible choice for investors. The truth is somewhere in between and completely depends on what you want. If you are willing to assume high risk to get potentially high returns, you’ll probably want stock and bond investments. However, if you are a conservative investor and don’t want to outlive your retirement savings, take a look an annuities. They may just the thing for your particular needs. And always consult a trusted financial adviser before buying any investment plan.

Fixed annuities are typically thought of for their safety. After all, you can’t lose money due to stock market declines when you are in them, right? Yes, but that does not necessarily mean they are safe.

Even though fixed annuities are safe in terms of not losing money in the market perspective, one thing you must consider is that there are other facets to them that may make them unsafe. The first thing is their lack of liquidity. Sure there is a tax deferral component, however, one thing to consider is that if you NEED the money, you might have to pay some penalties to get to it. This is often referred to as the surrender charges. Often times, these surrender charges can be quite steep on your annuities. This makes them risky from a liquidity stand point.

Another factor to consider is the rating of the insurance company. Now, if you ask me, ratings aren’t necessarily the ‘end all’ when it comes to safety. In a non apple-to-apple comparison, Merrill Lynch had Enron rated as a buy as the stock slid from its peak to single digits. Ratings aren’t always to be trusted and this holds true for insurance companies as well. The safety of an insurance company determines the safety of your annuity as well. It is important to do your due diligence and do it well when choosing an insurance company.

There are also many other factors to consider when it comes to choosing your fixed annuities that will determine their safety.

Variable annuities are inherently one of the most confusing of all the annuities in the market place. There is no doubt about that in my mind. They have many pitfalls and risks and if you don’t understand them, you are likely to get involved with an annuity that has high fees and horrible performance as well.

Now, don’t get me wrong, there are people who have held their variable annuities throughout the good market years and have done quite well. I would venture to safely guess that they would have done better outside the same variable annuity. And it’s a pretty safe guess. Also, there have been people who have invested money in a variable only to die with market losses and to have their families become whole by benefiting from the death benefit. IT’S NOT ALL BAD. But it’s mostly far from good. I can comfortably say that variable annuities do have some benefits, however, there are only a very few specific times where they fit in a client’s portfolio.

So with that said, let me talk briefly about the living benefit…the 7% guarantee. Everyone who calls asks me is it too good to be true. IF YOU HAVE TO ASK IT PROBABLY IS. Think about it, when the market interest rates are 3% and 4%, do you think the insurance companies just want to be nice and offer you a 7% return on your money? Do you honestly thing they can afford to offer you a rate of return that is that much higher than the market? The answer is NOT A CHANCE. They don’t get to be the big bad insurance companies by giving away money. And they don’t get to be that profitable by not being prudent about giving away money.

There are strings attached to this benefit. You must understand what the risks are and fully be aware of what the insurance company is doing to give you this ’7% guaranteed return.’

And just be aware, things aren’t always as they seem. In particular, when you get an offer for one of these 7% guarantees, read the fine print. See it is what you have to do in order to be given your 7% guarantee at the end of 10 years. You’ll be surprised at what you have to do in order to get the guarantee. And you’ll also be surprised at how long it takes to get your ‘guaranteed’ money. And in the end, you’re going to find out that it is not what it seems.

Incoming search terms:

I’m kind of tired of all the opinions about variable annuities. From all I’ve seen, the “expert advice” goes either strongly for or against the product. If the believers were correct, every sales office would have a line down the street but if the non-believers were correct, every insurance company would be shut down because of fraud.

I know that sounds extreme but it really does show you the difference in the type of advice you are bound to get. So if you are familiar with my work, you’ll know that I try to be objective and provide solid evidence as to the pros and cons of various products.

It’s been a long time coming but I’ll tackle the variable annuity debate in this article. Before I go further let me state that I’m not overwhelmingly for or against variable annuities and there are times when they work great and others when they are completely inappropriate.

Pros

Guarantees:

Death Benefit- This allows the heirs of the contract to inherit the full principal balance in the event that the contract owner passes away while the contract is in force and the account has lost value

Income- This allows the contract owner to lock in a predetermined level of future income regardless of account performance.

Principal- This allows the contract owner to recover the principal investment or the highest contract value achieved regardless of the account value at time of surrender.

Tax Deferral: Taxes are deferred on the growth of assets inside an annuity giving the contract owner the added benefit of greater compounding. Many critics suggest that excessive fees mitigate tax deferral benefits. If tax deferral is the sole focus of purchasing an annuity, expensive optional riders can be waived so that total fees will run no higher than the average mutual fund.

Unlimited Contributions: Retirement plans have contribution limits. If you ever come in to a larger sum of money, much of it will not be eligible for allocation in a 401K, IRA, etc. Annuities have no contribution limits.

Cons

High Fees: Many annuities have optional riders that push the overall fees to 3% or more. Plenty of products allow an investor to elect out of the options but some don’t. If you are purchasing an annuity with high fees, there had better be compelling reasons to do so.

Limited Investment Choices: Asset allocation options are limited within an annuity. Some contracts have predetermined portfolio balances and others will list a limited number of available mutual funds.

Surrender Charges: As with all annuities, variable products have surrender charges so your money is tied up for a specified period of time except for the usual 10% annual free withdrawal. Be positive that the surrender schedule works with your investment time horizon.

Immobility: The combination of investment limitations and surrender charges means that your money is much less mobile than it would be in an equivalent securities account.

As you can see, the analysis is pretty simple. If you are looking at the prospect of a variable annuity just weigh the pros vs. cons to figure out if it works for you. Unfortunately, most of the cons seem to kind of be deal breakers if even one is intolerable. That supports my thought that variable annuities have specific uses for a small class of investors. It either works for you or it doesn’t. Make sure to seek solid advice from an open-minded advisor.

Annuities have been around for hundreds of years. Matter of fact, annuities or “annua” were bought by Romans during the Empire in which the citizens of Rome would make a one- time lump sum payment for a yearly stipend for the rest of their lives.

During the 17th century, countries like England were constantly trying to fund their battles and needed a revenue source. The English government sold annuities to people with a promise to pay later. As people would die, the payments to the living policy holders would increase.

In 1759, a group of Ministers in Pennsylvania started their own annuity group whereby they would contribute to an annuity for a promise to receive income for the rest of their lives as well. Finally, in 1912 Americans were able to purchase their own annuities independent of a group.

During the Great Depression people were buying annuities because insurance companies were thought to be a safe place to put their money outside of banks and the stock market. Annuities were popular until the “New Deal” when President Roosevelt rolled out Social Security.

In 1952, the first Variable Annuity was born which allow people use their cash value to participate in the variable markets. In the 1990′s, Index Annuities came out and billions a year have been sold ever since. Index annuities allow you to share in the upside market gains and none of the downside losses.

The biggest wealth transfer in history as already started as Baby Boomers have already started inheriting assets from the Greatest Generation of all, their parents. 2010 represents the start of the great flood of Baby Boomers punching their tickets with the Social Security system. The largest amount of people in history will be retiring and most insurance industry insiders believe 2010 will mark the beginning of Golden Age of Annuities.

Many Baby Boomers will buy annuities to supplement their retirement nest eggs, however I believe the Golden Age will not be seen until their kids, the Generation X and Y retire.

Generations X and Y will see traditional entitlement programs, pensions, and Social Security change by the time they are old enough to punch their retirement tickets. These generations will need an income they cannot outlive even more than their parents. Annuities can provide many guarantees which will be very attractive to all generations.

Annuity Benefits:

· Principal Guarantee

· Min. Interest

· Guarantee Lifetime Income

· Tax Deferred Growth

All of the above mentioned benefits are nice and will benefit some people however, the most important benefit will be guaranteeing an income for the rest of your life no matter how long you live. Some annuities will allow your income amount to grow from 5-8% a year until you start to withdrawal the money. Your agent can easily show you how much income you will be able to take out a year for the rest of your life. These numbers are real and are not based on hypothetical pie in the sky numbers.

As you can see, annuities have grown and will continue to grow in popularity among the masses. Annuities offer many benefits and people will be able to take advantage of many of the different benefits. The industry will continue to build and come out with new benefits and features to their products. The Golden Age of Annuities has only just begun.