Annuities are one of the most debated financial tools.
Some people see them as a reliable source of income for life, while others avoid them altogether. At Financial Enhancement Group, our view is straightforward: an annuity isnu2019t good or bad in itself. Itu2019s simply a tool u2014 and like any tool, its value comes from how and why you use it.
At their core, annuities are contracts between an insurance company and an individual. You provide a lump sum or a series of payments (called premiums), and the insurance company promises a contractual benefit, often in the form of guaranteed income. With traditional pensions becoming less common, some families look to annuities to provide the peace of mind that comes with a steady income stream that lasts a lifetime.
The problem is that annuities are often sold, not bought. Instead of families actively looking for them, annuities are often pitched as solutions without much explanation. That is why itu2019s so important to understand what role the annuity is supposed to play in your overall financial plan.
When evaluating an annuity, start with the question: why is this being offered to me? Common reasons include reducing market risk, creating a predictable income stream, or providing a sense of security. Those goals can be valid, but the product must fit your broader financial situation.
Many types of annuities are available u2014 variable, fixed, indexed, and single premium, to name a few. Each works differently, with its own set of features and costs. Thatu2019s where careful review becomes critical.
Important considerations when looking at annuities include the following:
- Income u2013 Annuities can provide lifetime income, which may help replace disappearing pension benefits.
- Customization u2013 Features and riders vary widely, so know exactly what youu2019re paying for.
- Fees and expenses u2013 Some annuities carry significant hidden costs that can reduce long-term returns.
- Liquidity u2013 Money committed to an annuity is often tied up for years or even for life.
- Taxes u2013 Growth in a non-qualified annuity is taxed at ordinary income rates when withdrawn, rather than at potentially lower capital gains rates.
Because annuities can be complex, itu2019s essential to read the prospectus carefully and work with a trusted advisor. A well-structured annuity may provide value in the right situation, but the wrong annuity can be costly and restrictive.
Itu2019s also worth remembering that not everyone needs an annuity. For some families, existing assets or other strategies provide enough security and flexibility. For others, an annuity can complement a broader financial plan by reducing risk and providing income stability.
Ultimately, annuities should never be viewed as one-size-fits-all. They are simply one Tool in the financial toolbelt u2014 useful when applied correctly, but not always the right solution.
If you already own an annuity or are considering one, take the time to evaluate whether it truly aligns with your needs and goals. Understanding the fees, features, and role in your overall plan is the first step toward making a confident decision.
Financial Enhancement Group is an SEC Registered Investment Advisor.
