subject: What Type Of Annuity Is Safe For You? [print this page] Retirees who want to supplement their Social Security and pension income can look to their savings. They can invest those savings to generate an income or they can annuitize all or part of them. The annuity - as an insurance product - can offer a lifetime income. But are annuities safe? Well, that all depends on what you need to be safe from?
Because annuities are insurance products, insurance companies can guarantee a lifetime income. Their vast number of their annuity contracts allows mortality statistics to ensure predictable payout obligations as a whole by the company. So, these insurance companies need only keep their funding, investments, and finances in good order for the duration of their payout obligation to you for your safety.
AB Best and others ratings companies monitor each company's 'financial health'. But companies can potentially fail their obligations - although this possibility is generally low.
Retirees either want to begin annuitization (getting monthly payouts) right away or delaying it until they're much older. The latter option is a form of insurance against running out of income due to depleting their savings because of living too long. These days, retirees have a 50% chance of living longer than 20 years once they turn 65. So, the projected duration of any annuity contract is a significant amount of time - if you're healthy. Note also that lifetime annuities generally leave nothing for the annuitant's beneficiaries.
Annuities come in two essential flavors: fixed annuities and variable annuities. For fixed annuities, the insurance company pays you a constant income for life. The contracts rely on long term interest obligations from high grade bond investments to assure your constant income.
The benefit of a fixed annuity is you're assured of this lifetime constant income. But living 20 years will allow even minor inflation rates to significantly erode the value of that income.
Payouts from variable annuities - and these include indexed annuities - are vulnerable to market variations. These also can give you a lifetime income - but one that continually varies. That's because their funded by stocks and mutual funds and other similar investments whose values fluctuate. Such investments may compensate for inflation.
Although a rising economy can increase your payout, a downturn can significantly erode the amount of payout you get. So, variable annuities leave you vulnerable to market variations - which will occur.
It appears that choosing a fixed annuity offers more safety for the retiree who needs to rely on savings' income. He may have to risk the threat of inflation.
Those that can afford more investment risk, might consider a variable annuity. But for the possibility of a retirement cut short, a better approach may be to split his savings - put part into a fixed annuity and judiciously invest the rest for growth.
If you are considering an investment in any type of variable annuity please carefully consider investment objectives, risks, charges, and expenses of the Variable Annuity and its underlying sub-accounts before investing. For this and other information about any Variable Annuity investment, always obtain a prospectus and read it carefully before you invest.
