Last Updated: January 2021
As consumers invest, only a few desired outcomes are typically a primary concern: increasing wealth and retirement planning. That is what investing is all about unless you get an adrenaline rush from playing the market.
While some investments can create wealth much faster, others are more known for safety and lower returns, such as annuities.
While annuities have been gaining popularity in the last decade with individuals of all ages, the safety of the investment is still a concern of many.
It raises a specific question regarding annuities: are annuities safe investments? That is what the rest of this brief article is going to explain.
- How Do Annuities Work and When Do They Make Sense?
- Are Annuities Safe Investments? The Benefits & Risks
- Other Investment Options Carry Significant Risk But More Upside
- Annuities are One of the Safest Investment Options in Planning for Retirement
Annuities Are Boring And Can Be Confusing. Let’s Get To The Root Of It! Here are the key takeaways…
Annuities are a safe investment if you choose a type of annuity that is not invested in the market. Variable annuities and indexed annuities will carry risk, much like other investments due to being invested in conventional markets, but fixed annuity products will have a guaranteed rate of return set by the insurance provider.
How Do Annuities Work and When Do They Make Sense?
When you start diving into the conversation of choosing safe investments, annuities are typically one of the options that are presented by financial professionals and considered by many consumers.
The same applies to other investment types such as CDs and investments that typically offer a relatively low rate of return compared to other options you have.
This is how annuities are specifically designed depending on the product you choose.
Fixed Annuities are a Contract Between You and the Insurance Provider
Fixed income annuities are attractive to consumers due to guarantees attached to the contract.
For a lump sum of cash, an insurance provider will provide you with a guaranteed income stream in your retirement years, either lasting for life or a set period.
While the rates are relatively low, the peace of mind consumers get with a guarantee is often what convinces them that an annuity is worth the consideration.
However, many consumers still want to be sure that they understand the fine print and have a good understanding of how safe an annuity really is.
Are Annuities Safe Investments? The Benefits & Risks
Annuities are generally safe regardless of market downturns, assuming you have invested in a fixed product.
Variable and indexed annuities still have a chance of losing principal during a market downturn unless you paid additional money for what is known as the “income rider” to your contract.
Fixed products, on the other hand, are not invested in your common markets such as the S&P 500, and the insurance company is bound by contract to pay out whatever guaranteed interest rate was offered when the annuity was started.
Annuities are Not FDIC Insured
It is essential to understand, however, that annuities are not FDIC insured. Annuities are backed and guaranteed by the insurance company offering them, which in turn, is monitored and regulated by the state insurance commissioner.
This means that your annuity is only as safe and guaranteed as the company offering them. This makes it imperative to work with companies with strong financial histories and a strong financial rating.
Ensure Your Annuity is Safe by Working with a Financially Strong Company
Financial ratings are issued by the common rating agencies such as A.M. Best, Fitch, and Moody’s. These rating agencies are tasked with looking at the entire scope of insurance companies’ financial outlook and performance and will issue ratings or grades based on their findings.
- You will want to be considering companies for your annuity that are backed by companies with an “A” rating, or better. This indicates that the company has good or superior financial strength and an extremely positive outlook going into the future.
- Some companies that may come to mind that fall into these top financial rating classes are companies that have been around for 100+ years such as New York Life, Northwestern Mutual, and Prudential.
Mutual insurance companies can also be a double win in some situations due to offering your guaranteed rate of return in addition to dividends.
Other Investment Options Carry Significant Risk But More Upside
On the flip side of safe investing with guaranteed returns, consumers need to be aware that it does not come without flaws.
Annuities are considered an underperforming investment and only make sense in specific scenarios. Often, this is going to be for individuals with limited liquid funds who cannot afford to lose money in the markets.
It is often best for individuals planning for retirement needing to steam income and safeguard what nest-egg they have already built over the years. For many, although not nearly as safe, it will still make more sense to invest in other options with more risk but more reward.
This leads us directly into our next subject of discussion.
All Investment Options Need to Be Considered
While the subject of the debate is currently the safety of annuities, it is still important to understand all the options you have available to you.
The best way to see all your options laid out in front of you is to work with a financial professional.
While annuities have gained popularity in recent years with a younger demographic, it still may make sense to consider investing in higher return options or to invest in both an annuity and higher risk, higher return options.
Comparing all options and understanding the risks is the best course of action you can take.
Annuities are One of the Safest Investment Options in Planning for Retirement
While annuities are not backed by the FDIC and offered by insurance companies as opposed to banks, they are still one of the safest investment options consumers currently can use to help plan towards retirement.
At lower returns, annuities still provide unique advantages and the ability to stream income for life.
With proper planning, the right company, and the best annuity product for your situation, they can certainly be a substantial addition to your financial portfolio, making retirement life feel both safe and comfortable.
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