Why Buy an Annuity

When making an important financial decision- like purchasing an annuity- it is necessary to have at least one good reason to make the purchase. An annuity may last for a few years or a lifetime, but if the purchasing decision is not a sound one, you will ultimately lose. However, there are enough reasons to justify purchasing an annuity as part of your financial portfolio.

1) Guaranteed lifetime income

Annuities were designed to provide a lifetime income for annuitants. This lifetime income is also assured (on a fixed or variable basis). Annuities are the only group of financial products on the market that provide a guaranteed lifetime income- with survivor options. The annuity concept is concerned with the creation and liquidation; making guaranteed lifetime income a critical purchasing reason for annuities.

2) Capital and interest guarantees

Annuities bear guaranteed base accumulation rates in the accumulation phase- even some variable annuities. Fixed annuities (along with some conservative variable annuities) also have guarantees on capital. This makes an annuity more than a low-risk investment, since it provides a safety net for annuity investors through regulation and statutory obligations. In the event of bankruptcy of an annuity provider, annuity investors would not have their hard-earned funds enter oblivion as well.

3) Tax treatment

Many annuities qualify for tax treatment on contributions (up to a certain limit). However, you should not purchase an annuity solely for tax treatment. Once a particular annuity is appropriate for your financial plan, tax-deferral on contributions should be viewed as a bonus.

4) Higher market rates than other income options

Annuities typically offer higher interest rates and rates of return when compared to alternatives in its asset class. In some cases, the base-guaranteed rates on annuities are just one or two percentage points off of the rates of return on Money Market Funds, for instance. As a medium-to-long term investment, annuities try to attract more investors by providing higher rates of return than short-term income options.

5) Fund management

Several persons do not have the time or expertise to manage their own investment. Other investors may just like the idea of having a portion of their investment that they need not worry about. The funds from annuity investors (in a particular annuity or portfolio) are pooled together and managed by fund managers. This is why annuities may sometimes have additional expenses and fees associated with them, but the benefit of having your fund managed in a regulated context is noteworthy.

Other less-significant reasons to purchase an annuity include the ability to make unlimited contributions; no probate and shelter from creditors. However, annuities also bear certain risks and limitations. It is important to assess your reasons for buying an annuity against these risks and against what a particular annuity offers. You should only buy an annuity that satisfies your need. It’s up to you to ensure that you know what those needs are and whether a particular annuity satisfies them.