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Why Are Annuities A Popular Retirement Vehicle?



Annuities have enjoyed the most popularity in the senior market. There is a major draw for this group due to the fact that annuities are able to offer a promised income that can supplement social security, for life. The other equally important attraction is that there is the bottom end safety, in that, you are unable to lose your initial premium. In this senior market, there is a genuine fear of living longer than their retirement savings permits. These investors view annuities as a way to get back in the driver’s seat by guaranteeing their income for life.

Guarantees

Annuities are very unique in the guarantees that they make. 1) you are guaranteed income 2) it is impossible to lose your initial principal or 3) you are guaranteed a return on your investment. Due to the new caveats that are being added to these products, annuities have grown in popularity, because the returns and guarantees appeal to a much larger group of investors.



Due to the fact that the guarantees are the most attractive features to annuities, it’s vital that you are working with insurance providers that hold a high rating. There are 4 rating systems (A.M. Best, Fitch, Moody's Investor Service and Standard and Poor's). The rating given by each of these is an indication of the company’s ability to cash out future investments. Due to the fact that annuity contracts typically lock you in to that investment for a period of 5-15 years, the financial strength of the insurance provider is vital to the peace of mind of the investor.

Income

There are a ton of insurance companies that are willing to pay you lifetime income on your investment. The way that they are able to do this is they take your initial premium, and invest it in a very conservative bond such as a US Treasury or high grade bond.

In a nutshell, when you buy an annuity, you are buying the peace of mind that you cannot outlive your income. Well, the insurance company is selling that peace of mind to you and they are taking on your burden. In the case that the annuity owner lives longer than their initial premium lasts, they will still receive those income payments as long as they live.

Young Investors

Generally, annuities are not extremely popular in the younger investors’ market, especially fixed and equity indexed annuities. The idea behind this is that younger investors are encouraged to pursue greater gains in order to accumulate more wealth. For older clients, the idea is to sustain what you have already accumulated. Moreover, younger investors are able to take a risk and lose some of their savings, because they have much more time to make up for the loss. If an older investor loses a portion of their savings, they may find themselves needing to risk even more, or worse, go back into the work force.

Are Annuities Popular When the Market is Bad?

In short, yes.

Investors who experience depletion in the stock market have a tendency to turn to annuities. There are two main reasons for this. The first one is that they feel like they have made a huge error in investing in with risk. The safety of annuities becomes very appealing. Secondly, they fear loss of even more of their investment, which is virtually impossible with annuities. There are constantly new features being placed on annuities to make them more appealing during rough economic times. The most popular one to date is inflation protection that goes along with lifetime income. Essentially, your income will increase every year to offset inflation.

Another attractive feature to annuities is the newly added beneficiary options. If an annuitant passes away, the remainder of the contract will go to the assigned beneficiary. Also, with some carriers, they will allow the spouse to continue the income payments for the rest of their lives as well.

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