First a disclaimer…I am NOT a registered investment advisor. That means I a not giving advice on how to invest. I’m merely reflecting on many years experience, both personal and professional. The good news is I won’t be trying to sell you anything.
That said, think very carefully before buying an annuity. Annuities are life insurance contracts. The sales agent plays on your fear of outliving your income in retirement. As a result many retirees dump a large part of their savings into annuities without having the slightest understanding of how they work. First of all, the contract you sign will be several pages of legalese that only a Philadephia lawyer would understand. That’s because a Philadelphia lawyer probably wrote it. The contract is designed to discourage you from reading it…just as well, because you wouldn’t understand it anyway. Second, the fees and penalties associated with annuities are enormous. If you change you mind and want to get at your principal it will cost you dearly. These penalties are called “redemption and/or surrender” fees and they can cost you up to 40% of your principal. Annuities are sold because the agent “is such a nice person”. They sell trust and they deliver confusion. Watch out for the 10% to 20% agent commission when buying annuities. Whatever amount of money you deposit into an annuity will lose up to 20% of its value because the agents commission is deducted immediately. And finally, many annuities carry the threat of early death. If you should buy an annuity and die the next day, your beneficiaries might forfeit the entire principal.
A final thought. Several years ago, the AIG, a large diversified insurance group, bought Sun Life Insurance Company of America for $600 million. The CEO of AIG boasted that the annuity fees and penalties of the Sun Life annuity “book of business” would allow AIG to recoup the entire purchase price in short order. That’s how significant annuity fees and penalties can be. A word to the wise…look around for other investments before signing an annuity contract. Or, at least, shop and compare annuity products from different companies. That should help you to buy the best of a bad investment.
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