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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: Whats wrong with annuities Date: 2/29/2004 5:44 PM
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First, there's an annuities board in Fooldom where annuity information is collected.

http://fireboards.fool.com/Messages.asp?mid=20368186&bid=113191

It has been pointed out that annuities can be a good deal in some cases. The problem is that they have been heavily promoted especially to seniors who don't need them. Often their high commissions make them more attractive to the people who sell them than they are to those who buy them.

If you buy an annuity, Fools would suggest you get one from an organization like Vanguard, Fidelity, TRowe Price, or TIAA-CREF. They have low cost annuities with minimal penalties to move funds.

The major problems with annuities are these--

1. They are often expensive. High commissions are often paid to the people who sell them. These costs can eat heavily into returns for the first year.

2. Their restrictions and exit fees (ie surrender charges) make it costly to move your funds if performance proves to be unsatisfactory.

3. They offer potential for your invested funds to grow tax free, but they are often sold to people in the 15% tax bracket or lower. For these people annuities are not a good deal. The hassles far outweigh the advantages.

4. Your profits are taxed at ordinary rates when you take distributions.

5. Sale of annuities to seniors has been the subject of Attorney General Investigations in several states. The SEC has issued a recent cautionary note.

When annuities begin their payout stage they are said to be annuitized. You can buy immediate annuities to pay benefits. This is a way to invest the payout from a life insurance policy, or a 401K or IRA plan. The insurance company offers fixed monthly payments for a specified period, often for life, sometimes for life or to a surviving spouse, sometimes for a minimum number of payments. These various options cause the amount paid out to change. In other words, you pay an extra fee for most of these options.

Advantages--

1. You get larger monthly payouts from a given amount of money than you would get from investments (but the insurance company gets the whole premium and nothing is left for your heirs unless you have selected a minimum payment option).

2. You don't have to worry about your investments. The insurance company takes care of it. (Choose a reputable insurance company with a sound rating to avoid some of the worries.)

Disadvantages.

1. Payments are fixed for life (or the specified period). You have no protection from inflation.

2. There is no residual value for your heirs (except as above)

3. Your plan is fixed and is difficult and costly to change if your circumstances change.

As to alternatives, Fools would suggest investment in mutual funds such as an S&P 500 Index fund. This gives you maximum flexibility to deal with any situation. You are on your own to earn returns that meet your requirements. But costs are low and hassles are few.
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