What are the pros and cons of investing in annuities?


Quick Answer

Benefits of annuities include that they accrue tax-free and often come with death benefits, which means that should an investor die before cashing annuities out, an heir will receive the funds; drawbacks include fees, loss of a step-up value, penalty taxes and a high investment rate for little return. Additionally, a fifth drawback of annuities is that they do not have favorable rates that many stocks enjoy, states Forbes. Stocks acquired through direct ownership may have a zero to 20 percent federal rate on dividends and long-term investments, whereas annuities are subject to higher taxes.

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Full Answer

One of the primary benefits of annuities is their capacity to grow tax-free for long periods. This growth trend continues until the investor or an heir cashes out the annuities, notes Forbes. A second benefit of annuities is that heirs are guaranteed at least the lump sum amount that investors put into an annuity account, should they die before cashing out. This results in a zero-loss scenario for the family.

A primary drawback is high fees; 1.5 percent is the typical rate for annuities, as noted by Forbes. Zero to 20 percent tax rates are another deterrent. Annuities also do not have a step-up value at the time of an investor's death, unlike stocks, which may generate additional income for account successors. Additionally, cashing in prematurely on annuities may result in financial penalties. Lastly, annuities may cause large deferrals.

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