Should You Purchase an Annuity?

There are people out there who simply don’t trust a large amount of money to be paid off by an insurance company. Sometimes, being so skeptical pays off. After all, you never can be too careful. People who do favor the use of annuities, however, tend to recommend that not buying the guarantees is always an irresponsible step because the purchaser increases risk. Both suggestions are supported. The key issue in purchasing an annuity is making an informed decision on the matter. Making informed decisions with insurance companies is always a good idea.

Here are some cautionary words about purchasing annuities. There are experts out there who worry that annuities aren’t good choices for people. Variable annuities are extremely profitable for the companies that sell them, while being terrible choices for most people. Most people are better off without an annuity, but with an index fund, instead. Index funds provide a much more favorable tax situation and overall, are extremely tax efficient for many people.

The growth of an annuity is as taxable as receiving an income, and at times, this might mean that the money that you are going to invest will be partially lost because of the taxes. Index funds are treated by the IRS as if your heirs just bought it at the value it had when you died. If you are planning on leaving your wealth behind, then a tax fund will be a great idea. The annuity tax is treated by the IRS as if your heirs just earned it and now they have to pay income tax on it. With the tax considerations aside, an index fund is simply a much better investment to make. You see, annuities usually invest in funds that are difficult to analyze because independent reports (such as Morningstar) aren’t available. Reports like these help with analysis of their annuity contracts.

Annuity contracts are extremely difficult for the average investor to read or comprehend. If you decide to make your annuity contract guaranteed income for life, two major things will happen. One of these things is that you will leave nothing to your heirs when you pass away. You are therefore sacrificing your principle. Another thing is that if you need emergency cash and would like to take some of it out, you can’t. It legally isn’t yours anymore. The choice is yours.