When it comes to choice of low risk investments that offer a reasonable return, many people find themselves torn between annuities and CDs.
Annuities are financial products, mostly offered by insurance companies, in which the person taking the annuity gives the company offering the annuities a payment (annuity premium), which is invested by the annuity company, guaranteeing the annuity holder an assured flow of income for a lifetime or up to a pre-agreed annuity expiry date. In some types of annuities, the annuity holder makes regular periodical payments to the annuity company, which the company invests on their behalf, and pays the annuity holder a lump-sum payment upon the maturity of the annuity.
On the other hand, CDs (Certificates of Deposit) are a form of time deposit, that is, financial arrangements in which the CD holder deposits an amount of money with a financial institution for a fixed period of time at whose end he withdraws the amount he invested plus the interest (usually pre-agreed) it has earned. The earnings on CDs are typically significantly higher than on usual savings, which can be withdrawn on demand.
As investment options, both annuities and CDs have their unique advantages and disadvantages.
The main advantage that annuities have over CDs is that annuities typically offer higher returns than CDs. Moreover, some of the guarantees available to annuity holders (like the guarantee of a steady stream of income for a lifetime) are not be available to CD holders. The downside of annuities is their relatively higher risk, at least when compared to CDs. As it were, in most cases the guarantees behind annuities are just backed by the strength of the company offering them, and if the company goes under (which is a real possibility in the current recession), the money annuity holders had put into their annuities also go down with it.
Turning to CDs, the main advantage that CDs have over annuities is the fact that they offer a lower risk than annuities. This is because, legally speaking, CDs are treated as savings whereas annuities are considered to be investments. Consequently, CDs (being savings) benefit from federal deposit insurance which annuities (being investments) donât benefit from. On the downside though, the returns on CDs tend to be lower than returns on annuities. Moreover, if one opts to cash a CD before its maturity, they are often subject to penalties which can amount to quite significant figures, although most annuities also do charge a âsurrender feeâ if the annuity holder opts to prematurely exit from the annuity agreement.
Steven Hart
http://www.articlesbase.com/insurance-articles/annuities-vs-cds-705707.html
February 26th, 2010 at 2:36 am
Annuities?
Okay. I understand that annuities are mostly for those that have maxed out their 401(k), 403(b), and IRAs. I also understand that with the high fees that come with them, you might be better off with stocks or mutual funds. With all of my knowledge of investing, I have yet to find a retirement or some other type of account besides the accounts mentioned above that will pay me monthly income for life and also pay the remaining to my heirs. I am 45+ years away from retirement. Any ideas?
February 26th, 2010 at 7:38 am
you need to accumulate capital long before you have to worry about how to get an income for life out of it.
if you are 45 years from retirement, start investing now, contribute regularly to mutual funds that will grow over time and give you a big nest egg. Either get a financial planner or talk to the investment arm of your bank
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February 26th, 2010 at 7:40 am
unfortunately, you did your research….an annuity is really the only thing unless you want to explore some life insurance products, but there is so many variables to discuss I couldn’t possibly do it here. But you need to understand an annuity. The basic premise of an annuity is basically insuring the stock market. What you are referring to as "expensive" is the guarantees. But remember, most of those guarantees are only costing you between 1.5-3.5%. I don’t think that is very "expensive" given the features.
The insurance industry are very powerful and very good lobbiest in Washington. The only products out there that offer tax deferred and guarantee capabilities. If you want to be paid for life though(turn on the annuity feature) some annuities won’t pass the lump sum onto your heirs others will. Look for an annuity with annual payments for life and pass the money to heirs. Some have a feature that only allows 7-11% a year to be paid out.
Think of an annuity like a car, so many different features, some matter to you and some don’t, so make sure you are paying for what you want and nothing that you don’t. I think you need to talk to a financial professional.
Given your age and if you have maxed out your retirement savings (401k and ira) and you still want a tax deferred vehicle-the annuity is a good choice. Again, talk to a financial professional.
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Financial Planner
February 26th, 2010 at 7:42 am
actually any of the above retirement plans will be passed on to your heirs. At your age you should be putting money in both a pretaxed and after taxed retirement vehicle. The reason for this is becuase if you put it all in a pretaxed investment you may put yourself in a position where you will have to withdraw a amount from your retirement plan that it puts you in the maximum tax bracket. so make sure you are contributing to both and ira or 401k and a roth ira.
traditionally Annuities are more of an option and suggestion for a middle aged person so I wouldn’t consider one until you are a little older. And actually depending on what kind of annuity you chose the annuity may not be passed on to your heirs. For example a life annuity will pay you the most monthly but will not be passed on to your heirs. You should definitely wait for several years to consider an annuity until you see where you stand. You actually may find that you will be better in retirement by living off tax free interest of municipal bonds than an annuity.
If you want a fixed monthly income in retirement you could considere finding a job that has a pension benefit.
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February 26th, 2010 at 7:44 am
Are you that same kid who was on here before touting your elementary knowledge of annuities because you just got your 6 and 63 certifications?
I do about $10 million a year in annuity business and they are good for some situations and shitty for others. Like "paying the remaining to your heirs."
Do you have any knowledge of the tax implications of dying with an annuity in your posession even with stepped up or increased death benefits? Look into this before someone suckers you into some shit product. If you are 45+ years from retirement, what the hell do you care about a monthly income. Find a good broker and swing for the fences to make as much as possible. Then consider an annuity for protection later in life perhaps. Lets do this….you buy your annuity and Ill take my SMA and lets see who has more in 20 years.
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