{"id":965,"date":"2023-01-17T15:15:04","date_gmt":"2023-01-17T19:15:04","guid":{"rendered":"https:\/\/gpswp.com\/wealthflowfinancial\/?p=965"},"modified":"2023-01-17T15:15:06","modified_gmt":"2023-01-17T19:15:06","slug":"why-are-annuities-so-attractive-right-now","status":"publish","type":"post","link":"https:\/\/gpswp.com\/wealthflowfinancial\/why-are-annuities-so-attractive-right-now\/","title":{"rendered":"Why Are Annuities So Attractive Right Now?"},"content":{"rendered":"\n

By Jay Shareef and Chris Rhoads<\/em><\/p>\n\n\n\n

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Annuities have gained significant popularity over the last year or so as investors have shied away from rising interest rates and market volatility. In fact, annuity sales hit record highs in 2022<\/a>, reaching $80.7 billion in the third quarter alone, and the overall annuity market is expected to grow to $298.7 billion by 2026<\/a>. So what exactly are annuities and what makes them so attractive right now?<\/p>\n\n\n\n

<\/a>What Is an Annuity?<\/h2>\n\n\n\n

An annuity is an insurance product that pays out a stream of income either for a set period of time or for life. Similar to other insurance policies, you sign a contract with an insurance company where you agree to pay a premium amount (either lump-sum or monthly payments). These funds are then invested by the insurance company and paid out to you at some point in the future.<\/p>\n\n\n\n

An annuity essentially functions as insurance against the risk of outliving your retirement funds. Annuity income is guaranteed based on the terms of the contract and will be paid out even if the underlying investments do not perform well or the account is depleted early.<\/p>\n\n\n\n

There are three main types of annuities:<\/p>\n\n\n\n

  1. Fixed: <\/strong>Guarantees a minimum interest rate and a fixed number of payments for a set period of time.<\/li>
  2. Variable: <\/strong>Allows the purchaser to choose different investment options which yield higher or lower returns based on performance.<\/li>
  3. Indexed:<\/strong> Pays a capped interest rate based on a stock market index like the S&P 500.<\/li><\/ol>\n\n\n\n

    <\/a>Why Are They So Popular?<\/h2>\n\n\n\n

    Annuity sales have skyrocketed in 2022, in part due to the uncertainty in the stock market. Rising interest rates and volatile stock performances<\/a> have investors flocking to safer investments like certificates of deposit, money market accounts, U.S. Treasuries, and annuity products.<\/p>\n\n\n\n

    Here are some of the benefits an annuity can provide:<\/p>\n\n\n\n

    <\/a>1. Guaranteed Income<\/h3>\n\n\n\n

    The guaranteed income element is one of the biggest advantages of an annuity. If you\u2019re worried about outliving your money in retirement, an annuity ensures you have supplemental income for the rest of your life, or for whatever time period is stipulated in the contract. There are many different types of annuities on the market, so the exact amount and number of payments you\u2019ll receive may vary. Before you buy an annuity, it is crucial that you understand the terms and conditions.<\/p>\n\n\n\n

    <\/a>2. Protection From Downside Risk<\/h3>\n\n\n\n

    Annuities insure against downside risk and can provide a buffer against stock market volatility. If you purchase an annuity that has a fixed interest rate of, say, 7% you are guaranteed to earn that much regardless of how the stock market actually performs. This can be a huge relief during times of extreme market volatility as we\u2019ve seen over the last year. The downside? If there\u2019s a cap on your interest or you have a fixed rate, you won\u2019t be able to take advantage of the upswing if the stock market returns more than 7%.<\/p>\n\n\n\n

    <\/a>3. Tax-Deferred Contributions<\/h3>\n\n\n\n

    When you contribute money to an annuity, it grows tax-deferred. You won\u2019t pay taxes on the investment growth until you start receiving payments. Depending on your contract\u2019s interest rate, your account value could grow substantially from the time you invest funds to the time you withdraw.<\/p>\n\n\n\n

    You may even be able to invest pre-tax funds into an annuity by purchasing the product through your 401(k) or another employer-sponsored plan. This is a relatively new option that many employers are embracing, and since retirement plan providers are required to thoroughly vet insurers, this may be a better way to purchase an annuity than combing through all the options on the open market.<\/p>\n\n\n\n

    <\/a>Important Considerations<\/h2>\n\n\n\n

    Though the advantages of annuities make them very attractive in the current market environment, they are not for everyone. There are still several important considerations to keep in mind before deciding if an annuity is right for you.<\/p>\n\n\n\n

    <\/a>1. Complexity<\/h3>\n\n\n\n

    There are a vast number of annuity products on the market today with a wide range of complexity. As a general investing rule, never purchase a financial product you don\u2019t fully understand. While the payout may seem promising, there could be extra fees and penalties buried in the fine print.<\/p>\n\n\n\n

    Unlike funds deposited in banks or credit unions, annuities do not have federal protection<\/a> if the insurer goes bankrupt. States provide some protection, but it varies depending on where you live. What would happen to your annuity if the insurance company goes under? Are you promised returns on optional benefits you purchase with your annuity? How much will your insurer or agent make on this product? These are all questions to consider when purchasing an annuity.<\/p>\n\n\n\n

    <\/a>2. High Fees & Penalties<\/h3>\n\n\n\n

    Annuities have a long-standing love-hate relationship with the investing public partly because they\u2019re often sold by agents who receive sales commissions and management fees. In return, many clients don\u2019t know if they\u2019re being pushed to buy a product they don\u2019t need. Annuities also come with many fees<\/a>, such as:<\/p>\n\n\n\n