Annuities-A Safe Investment Alternative or Not?

Are annuities safe? Well, that is a question that deserves great attention.

First of all, it is important to know what type of annuity you are dealing with. Fixed annuities are safe from stock market fluctuations while variable annuities aren't. Immediate annuities are pretty much encompassed by a set of terms that are predetermined but it doesn't mean that they are safe. And while fixed annuities are safe from market fluctuations, they can be subject to lack of safety due to the nature of the insurance company providing it.

Safe is a relative term. It is a term that can be used in many different contexts. When I am asked if an annuity is safe, the answer is, 'it depends'. First of all, what are you referring to? Are you referring to safe from the market? or are you referring to safe from a downturn in the economy? Perhaps you mean safe from the standpoint of our economic system failing? One thing to consider: Was investing your money in a huge Energy company (Enron) safe? Was investing your money in an enormous retailer (K-Mart) safe? The face value does not always determine the real value as seen in the examples provided here. Insurance companies are potentially no differet.

Furthermore, the type of annuity determines it's degree of safety. Again, a variable annuity is subject to market risk although the death benefit (depending on the annuity) may be guaranteed never to be lower than your initial investment. Fixed annuities insulate themselves from the stock market but is it a safe investment if you own a 3% annuity and inflation drives rates up to 20%.

One needs to consider that there are so many factors to consider when buying an annuity. Just because your annuity agent tells you it's safe, you have to take that with a grain of salt. You must determined that quality of the insurance company (RATINGS AREN'T ALWAYS THE BEST DETERMINANT NEITHER), the quality of the investment, the type of the investment and most importantly, your financial goals. If you can't afford to lose money, a variable annuity is not safe. If you can't afford not to make a reasonable 'stock market type return' than a fixed annuity may not be safe.

Know what you need going in. Consider ALL the factors and consider the market environment. And also, consider the fact that no one cares about your money more than you do....not your agent or the insurance companies. Sad but true. And if you go in with this notion, you'll likely come out ahead.

Ignorance is not Bliss!