Don’t Buy An Annuity if You Don’t Need the Guarantees

Marketwatch’s Stan Haithcock told us the “7 reasons not to buy an annuity” last month.  This article is relevant for a few reasons.  Some people just don’t need an annuity in their financial plan because they have already met the needs that an annuity fills in another way.  Annuities offer specific benefits in retirement and you surely shouldn’t pay for those benefits if they do you no good.  But Stan’s article is great for the opposite side of the issue as well.  If you don’t need the seven things that are listed in the article, you shouldn’t buy an annuity.  But if you do need any of those seven things, an annuity is likely a good investment for your financial planning.

Annuity owners do not have to professionally manage their money themselves.  If you, or your trusted financial advisor, manage your money professionally then you may not need an annuity.  But if you don’t know enough about the markets or don’t have the time to dedicate to managing your own money, annuities can do that for you.  You won’t receive the same type of growth with annuities that you could if your money is directly in the stock market.  Variable and indexed annuities offer growth tied to the markets, but they do have some limitations.  Stay in the markets if you want unlimited growth.  But those same variable and indexed annuities are protecting your principal from loss, something that isn’t possible when you are invested directly in the markets.  Annuities compromise some of your gains but offer guarantees not available in the markets.  If you aren’t concerned about the guarantees, then an annuity isn’t necessary.

Long term care insurance is crucial these days because we are living such long lives.  An LTC rider attached to an annuity is a nice extra bonus, but should not be the only long term care insurance that you carry if you specifically want to cover LTC care.  For full long term care insurance, find a straight LTC policy.  The more benefits the better is not necessarily true with annuities.  Annuity products offer additional riders, which give benefits you might be looking for.  Each rider costs money though, so only opt for the riders that you want to specifically address with each annuity purchase.  If you already have a legacy to leave to your heirs, you don’t need death benefits.  If you have a large company pension, you don’t need lifetime income.  Annuities shouldn’t be used to meet every need y0u have in one product.  Use them for the specific need that you want them to cover.

Don’t buy an annuity if you have only seen one product from a single carrier.  It’s wise to shop around for annuities just like you do for most other things that you buy.  Do your research, speak with experts, and find an insurance carrier with strong financial ratings before buying an annuity.  The most important reason that most people buy an annuity is for the lifetime income guarantee.  Annuities solve for longevity risk, they are the only products to guarantee this income as long as you live.  If you don’t need an income guarantee, you might not need to buy an annuity.  Annuities transfer risk from their owner to the insurance company carrying the guarantees.  There is a feeling of calm and safety when you don’t have to worry about outliving your savings.  Some people aren’t concerned with that risk transfer and are comfortable managing the risk themselves.  If you are one of them, then an annuity might not be for you.

Annuities protect your principal, offer lifetime income guarantees, and can offer other benefits as well.  There are great benefits to purchasing an annuity, but you need to find the product that is suitable to meet your needs.  Stan suggests going with your gut if you feel that a sales pitch just isn’t right.  If you are someone who does not find importance in the benefits offered by annuities, then they aren’t the product for you.  Speak with an expert before making any financial decision like buying an annuity.

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