Annuities may offer a solid deal – a guaranteed income for life. However, annuities are complex products, sometimes confusing and not always are the most straightforward or simple products. Many people are unfamiliar with the benefits offered by annuities, And while these products can be a valuable part of a retirement portfolio, there are also a number of disadvantages associated with annuities.


Tax Advantages
In many cases, annuities offer very beneficial tax advantage. Depending on the kind of annuity, when you buy an annuity your funds are invested tax deferred until you begin withdrawing your funds, provided the beneficiary is at least age 59 1/2. If not, then a 10% penalty is assessed upon the withdrawal, just as with an early distribution from an IRA or qualified plan.

When you start withdrawing payments, only the portion of your investment that was gained is taxable. While this means that you have to pay taxes, in many cases your tax bracket will, most likely, be lower than during your working life.

All distributions, whether early or normal, are taxed as ordinary income to the recipient and reported on Form 1099-R. The exclusion ratio is used to calculate the taxation of annuity payments. This formula allocates a proportionate amount of each payment made as a tax-free return of principal.

Annuities are not subject to ERISA (Employee Retirement Income Security Act) regulations unless they are placed inside an IRA or qualified plan.

Rate Of Return
Typically fixed annuities offer a guaranteed rate of return. The actual amount depends on the agreement – the annuity contract – with the issuer (generally a life insurance company). While the guaranteed funds may, on average, be lower than those of stock market investments or mutual funds, the fact that fixed annuities offer a guaranteed return on investment makes it a desirable option for many investors.  This may especially be the case for people planning retirement investments.

For people who worry about running out of money, annuities offer another benefit. If you opt for a lifetime annuity, you will keep receiving withdrawl payments for the rest of your life. Furthermore, if you choose to pay an extra fee (or accept lower payments), most annuities will increase their withdrawal payouts to you to keep pace with inflation.

Fixed annuities are insurance products.

Variable annuities typically offer a guaranteed rate of return (basis), but includes some investments based on stocks, index funds or mutual funds so you have an opportunity to improve that return.  The guaranteed rate of return is an added ‘security’ in cases the investment portion of the  annuities are not doing well.

No Maximum Investment
Unlike 401k and IRA accounts, there is no maximum investment amount for annuities. This means that if you are looking to invest as much money as possible in a tax deferred investment,  annuities may be the right option for you.

Other benefits
Although the tax-advantaged status is one of their biggest advantages of annuities, they offer several other unique benefits as well. For example, annuity contracts are exempt from probate. This means that upon the death of the annuity contract owner, the contract value will pass to the beneficiary without going through probate.

Another benefit is that annuity contracts are, in most cases, also largely exempt from creditors. However, the exact rules vary from one state to another. Texas, for example, is one state that unconditionally exempts annuity contracts from creditors.


While annuities are generally a good, risk adverse investment option,  there are disadvantages that may prevent the typical investor from investing in a fixed or variable annuity.

Not Very Liquid
Most annuities have a penalty for early withdrawal. Penalty can be as high as 10% in the first year (usually declining after a few years). And while it is possible to sell annuities on the secondary market, but there may be transfer fees.

Potential of High Fees
In addition to the early withdrawal penalty, the regular fees tied to annuities may be higher than those of normal retirement investments. Because most annuities are insurance products, they don’t have the economies of scale that investment companies have. This may result in higher fees, reducing the actual annuity yield for some annuities by 2-3%.

The Bottom Line

Annuity income may, for some, be preferable to income generated through a stock portfolio. On reason is that annuity income is much more of a sure thing. Annuities are also more appealing because managing your own investments through a stock portfolio may take more time and skill than working with annuities.

As said, annuities have pros and cons. Their benefits  depends on what type of investor you are. In most cases, investors are encouraged to max out their IRA and 401K plans before considering an annuity.

Next Steps…

Contact us today and ask for your free no-obligation quote. We will help you explore a variety of insurance options and discounts. Call us at 1-800-497-6114 or email us. Alternatively, have an insurance-licensed Sunvalley Insurance representative contact you.