14 Jul 7 Reasons to Buy an Annuity
Wondering about the reasons to buy an annuity? This is understandable.
Annuities are big business with billions of dollars of annuities sold every year.
According to a 2022 LIMRA news release, “Total U.S. annuity sales were $254.8 billion in 2021, up 16% from 2020. This represents the highest annual annuity sales since 2008, and the third highest sales recorded in history, according to preliminary results from the Secure Retirement Institute® (SRI®) U.S. Individual Annuity Sales Survey. Total annuity sales were $63.4 billion in the fourth quarter, 8% higher than fourth quarter 2020.”
The key here is that people are being sold annuities – most are not buying annuities.
Given the current financial environment, some advisors use fear-based tactics to sell annuities.
But, as we say here at Stop Being Sold®, consumers should be researching and then buying rather than being sold a financial product they don’t need or want.
Annuities are custom products, and they should only be bought after you know how you intend to use them and understand how they will work to help you achieve your financial goals.
Keep reading for 7 reasons to buy an annuity to see if it is the right financial product for you.
#1 You Like Guarantees
Who doesn’t like a guarantee? Guarantees feel safe, and this is one of the main reasons to buy an annuity.
With an annuity, you buy the contractual guarantees of income or growth.
Those who want guaranteed income lean toward an immediate annuity or an income annuity.
Those who want guaranteed growth lean toward a fixed annuity or MYGA (multiyear guaranteed annuity).
[If you don’t know the different types of annuities, take a minute to read Types of Annuities Explained.]
Remember, the type of annuity you buy should depend on what you’re looking for and what you want your money to do for you. Knowing the different types of annuities will help you determine if you have reasons to buy an annuity.
#2 You Want Predictable Income in the Future
Another one of the popular reasons to buy an annuity is to receive predictable income in the future.
With an annuity, you can guarantee yourself a set amount of income in the future.
Annuities help you calculate your future income to the penny using the future-dated guarantee the annuity offers.
You can see what your income will be 30 days, 5 years, or even 10 years from now.
If your goal is to receive a predictable income in the future, you must look at the contractual guarantees that each policy offers.
#3 You Find the Tax Deferral Appealing
Annuities are taxed when you withdraw funds.
This is unlike other accounts, such as mutual funds that hit you with capital gains or CDs that give you 1099s each year.
Keep in mind that this is only one of the reasons to buy an annuity.
For example, if you have a 401(k), you already have a financial product that is tax-deferred so there may not be any additional benefit to buying an annuity.
[Related Read: How Annuities Are Taxed]
#4 You’ve Maxed Out Your Other Accounts
There are no limits on the amount you can invest into non-qualified (NQ) annuities.
Other financial investment vehicles, such as 401(k) plans and IRAs, have contribution limits.
- Employee contribution limits for 401(k), 403(b), most 457 plans, and the federal Thrift Savings Plan for 2022 is $20,500.
- For those age 50 and older, the 401(k) catch-up contribution is $6,500 for 2022.
- The 2022 IRA maximum contribution limit is $6,000 with a catch-up contribution for people aged 50 and over at an additional $1,000.
If you have these types of investment accounts and you’ve maxed them out, you may have a reason to buy an annuity.
This will allow you to accelerate your savings.
However, for this reason to qualify, you must max out all your other accounts first. Don’t jump the gun.
#5 You Want to Remove Risk from Your Portfolio
If market conditions sour, your investment portfolio is at risk. You may suffer losses simply due to the environment we are in today.
For some people, the risk is too great. They spend their days watching the stock market rise and fall and live in constant fear.
If that sounds familiar, you may have one of the reasons to buy an annuity.
Depending on the annuity, you can get guaranteed interest based on the contract, such as a fixed annuity or MYGA.
This will allow you to know you have a guaranteed rate coming in (even if it is smaller). Some people believe this feels better than dealing with a volatile stock market.
Index annuities will allow you to participate in the gains of an index up to your declared caps or participation rates.
CAUTION: Variable annuities still have a market risk based on the underlying assets in the account. If your reason for buying an annuity is to remove risks from your portfolio, do not buy a variable annuity.
#6 You Need Diversification
It’s no secret that you want to diversify your investments. This allows you to reduce your risk and maximize your returns.
You can diversify your portfolio by adding an annuity as an asset class to your overall retirement.
Some people will use annuities like a bond in their overall mix of assets.
#7 You Require It for Estate Planning
Most annuities assist with avoiding probate.
When you pass away, the insurance company will pay the remaining assets to your declared beneficiaries, bypassing probate.
This is one of the reasons to buy an annuity.
Along the same lines, some people buy an annuity because they don’t qualify for life insurance because of health or other reasons.
Therefore, they buy an annuity because they want to set up beneficiaries to get funds after they pass away. Plus, with an annuity, they can even set it up for beneficiaries to receive the annuity a certain way (such as an income stream) to avoid their beneficiaries blowing a lump sum.
Now that you know the 7 reasons to buy an annuity, take some time to learn the 9 reasons not to buy an annuity.
One last thing: Do your own research!
Understand the reasons to buy an annuity and the reasons not to – and form your own conclusion based on where you are and what your goals are.