Why Is Buying an Annuity Risky?

Why Is Buying an Annuity Risky?

Some of the risks associated with purchasing annuities include surrender charges, various restrictions, high expenses and the insurance company going under. Investors are advised to get an objective view from an independent third party before purchasing annuities.

Surrender charges are a risk with index and variable annuities, and can be imposed up to 10 years after the annuity is purchased. These charges can be up to 10 percent of the annuity as of 2015, and are imposed for withdrawals higher than the initial free withdrawal amount.

There are various restrictions that can attract federal tax penalties of up to 10 percent of the annuity. These restrictions range from the amount of money that can be withdrawn per year to the minimum age required to make a withdrawal.

Some annuities are also associated with high expenses, particularly in commissions and fees. The expenses can amount to up to 3.5 percent of the annuity annually. The original sale commission for annuities can be up to 8 percent.

Finally, there is the risk of the insurance company going under. It is important for investors to look into legal protection of their investments in case of such an event. Investors are also advised to consult with experts with no vested interest in the transactions to find out if their specific financial situations warrant the purchase of annuities.