Fixed Annuity Risks To Watch Out For
With the prevalence of warnings that accompany annuity products, it is important that you understand the risks involved in your investment. You should carefully consider the fixed annuity risks before you make any sort of decision regarding your hard-earned retirement money. A fixed annuity is generally considered a low risk investment options, though there are certainly some things that you should consider before you purchase.
For many investors one of the primary concerns that they have regarding any new vehicle is related to the amount of risk they are taking on. This is true for just about any type of investment, regardless of the size or nature of the product. The risks of a product are important to understand and should be a major contributing factor to whether or not you invest in the product. Even some of the more conservative and risk-averse investment choices have a degree of risk associated with them.
The fixed annuity is safe in regards to receiving what you are contracted to receive. Because the annuity product is issued through an insurance company, the annuity owner does not face the same risks as other financial industries. The insurance industry is regulated on the state level, each state having similar guidelines for the insurance companies it regulates. As such, insurance companies maintain a much more conservative overall portfolio than investment firms or banks do. The fixed annuity risk from company failure is quite low as a result.
The real fixed annuities risk that you may face is through inflation. Because of the nature of the contract, the investment is designed to pay out a fixed dollar amount for a specified number of periods. Many annuity owners choose a life annuity option and receive payments for the remainder of their life. The payment will generally not change, and is therefore at risk to inflationary factors. Some provisions in the product may account for small inflation adjustments year by year, but few annuities can handle high inflation periods.
When you see warnings about fixed annuities, the most common reason is due to professional fraud. Most warning are associated with an insurance salesman trying to sell you a product you neither need nor understand. Because fixed annuity can have higher commissions to the agents selling them, it opens the door to dishonest planners pushing annuity products their clients do not need. This is not to say that just because you planner recommends an annuity, he is a fraud and a cheat. What it does mean is that your planner should be able to adequately explain to you the benefit of using a fixed annuity rather than some other financial product. There are still a number of very good reasons to use annuities in retirement planning.
There are certainly different fixed annuity risks that you should be aware of. You should never purchase an insurance or financial product without first understanding the risk that you will be taking on. Understand however, that without risk there is no reward. A little bit of risk may ensure that your accounts will continue to grow.
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