Who Should Not Buy an Annuity? Top 3 Reasons

Is an annuity for everybody? As attractive as some features are, there are some key reasons why an annuity product may not be a fit for your retirement plan. These include having enough or not enough money in your investment portfolio. Even your expected health situation comes into play!

An annuity contract is a product issued by a life insurance company that can be used to accumulate money at attractive interest rates before retirement (this kind of annuity is called a deferred annuity). That money can then be used to create a stream of supplemental income, usually in retirement (this is called annuitization).

Annuities sound attractive, right? For many people, annuities make good sense. But there are a few situations where purchasing an annuity may not fit into your retirement plan.

Reasons Not to Buy an Annuity

While an annuity product can play an important role in both accumulating and distributing money in retirement, there are some cases where it might not make sense.

1. You Do Not Have a Lot of Money

If your nest egg is small, you may not want to commit a large amount of money to an annuity. If you are looking to accumulate money before retirement, you’ll need to remember that annuities are long-term investments and are subject to surrender charges for early withdrawals.

In fact, as part of their due diligence, insurance companies may ask what percent of your total assets is represented by your deposit. They don’t want you to overextend yourself and, as a result, possibly lack cash liquidity.

If you are looking to buy an immediate annuity (or income annuity), you may not want to commit a sizable portion of your nest egg. Once you make the deposit, it can only be returned in monthly payouts, and access to the lump sum is not available.

3. If You are in Poor Health

When you annuitize an annuity contract, you are essentially handing over a lump sum of money to an insurance company in return for a guaranteed income stream.

This is a good deal if you are generally healthy, but if you need access to money due to current or anticipated health care expenses, including long-term care and/or assisted living, you may want to think twice before committing large sums of money to an annuity.

3. Short-Term Savings is Your Primary Focus

Before considering making the long-term commitment of money to an annuity, make sure your short-term savings goals like buying a car or putting a down payment on a home are met. An annuity can likely fit into the plan when you can balance short- and long-term needs.

Who Should Consider Buying an Annuity?

If you are approaching retirement and want to grow money safely, then an annuity could be a good choice. If you or your financial advisor are comfortable creating a mix of products as part of your overall financial plan, then an annuity may fit well.

This is especially true if your financial goals include retiring comfortably, but you want guaranteed income as a foundation for this plan.

So, if you are interested in protecting some of your nest egg and want to keep some of your money out of the stock market to protect from downside risk, then look into annuities.

Evaluating and Picking an Annuity

When picking an annuity as part of your retirement plan, there are a few things you need to know.

First, you should know the basics of how annuities work and how they differ from other retirement planning tools like IRAs, mutual funds, and other popular investments.

Second, an annuity has two phases, the accumulation phase, generally before retirement, and the distribution phase, usually when you are in retirement.

Third, these contracts generally come as one of three different types of annuities: fixed annuities, variable annuities, and fixed-indexed annuities.

It’s a good idea to speak with a financial planner because the choices for distributing your money can be daunting. This is especially true when adding additional riders, such as death benefits and planning for any beneficiaries.

Key Takeaways

Annuity products can be complex and are not for everyone. But in the current interest rate environment, annuities can be an excellent (and safe) place to put some of your savings.

Canvas Annuity’s products have some of the highest rates in the country that are guaranteed for 3, 5, or 7 years with current rates as high as 4.60%!

If you are interested in allocating part of your nest egg to provide guaranteed retirement income, then an annuity is the only product that offers this security. Reach out to one of our representatives today to learn more about how we can help you.