Are Annuities a Good Investment?
Opinions about investment products are a lot like noses: everyone has one. Of all the financial investments available in the marketplace, annuities probably cause more debate than any other. The reason such a vast divide exists is likely due to a combination of two things: a misunderstanding of their true purpose and the creation of dozens of new product variations in the past 70 years.
What is an Annuity?
Most historians agree the Romans were the first to administer annuity programs. Although, there is some evidence that the Egyptians may have beaten them to the punch.
The Latin origin of the word annuity is “annua,” which translates to annual payments. As payment for their services, military personnel were provided lifetime annual income. Funding was provided in the form of an initial lump-sum contribution. Effectively, the Romans created what is known as a Single Premium Immediate Annuity (SPIA).
Annuities are a form of insurance. This fact should not be lost when considering purchasing an annuity product. Whereas life insurance protects against dying too soon without sufficient funds for survivors, annuities protect individuals from outliving their savings.
What is right for one individual may be entirely inappropriate for someone else. This is most certainly true when it comes to investments. However, the question is not whether annuities are good or bad but whether they are investments at all.
The purest form of annuities, SPIAs, are not investments but insurance products. An insurance company will guarantee a lifetime of equal income payments to the insured in exchange for a single payment. For over a thousand years, this is how annuities worked. Then in 1952, everything changed.
Deferred annuities were introduced by TIAA-CREF, which meant instead of annuitizing immediately, contracts could accumulate cash value to be annuitized later. Tax deferral benefits arrived more than 30 years later in 1986, with market-tied returns appearing in index annuities in 1995. However, it wasn’t until then that the words annuity and investment became intertwined.
If we agree SPIA annuities are an insurance product (they are), then our question is no longer whether annuities are a good investment. Rather, the choice to purchase an annuity becomes an income planning, not an investment decision. To this end, what is “good” depends more on an individual’s desire for security than investment return.
As for the deferred, index, and variable annuities, whether they are a “good” investment will be predicated on dozens of factors. Access to tax-preferred vehicles, management fees, and projected returns are just a few considerations that must be made. Therefore, it is recommended to consult your tax advisor in addition to insurance and investment professionals before determining if an annuity is a “good investment.”
Before you consider purchasing an annuity, contact my office today to review all your available options.
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