In this article we look at Annuity Risks, talking about what annuities are and the risks involved in the different types of annuities available. We also give some pointers on how to prevent the risks.
What Is The General Risk Rate Of Annuities
Annuities have often been advertised and marketed as investment vehicles for investors who are risk-averse like the retirees and other people who can not afford to take risks and gamble with their hard-earned money. Annuities work in such a way that the contract owner makes a specific payment, or a series of payments to the insurer, which in turn invests the money and soon guarantees a lump sum amount upon the maturity of the annuity; this is also true with a steady flow of a lifetime income (or up to a specific period time). And while annuities are considered relatively low-risk investment vehicles, they definitely carry any form of risk which the individual taking them up should be aware of.
Annuity Risks In Variable Annuities
The element of risk in annuities is especially huge in the case of variable annuities. The interest rate of a variable annuity depends on how the investment performs into which the premium is placed. The contract owner has the authority and the hand to choose the investments into which the investment will be put. Consequently, if the chosen investment type performs poorly, the valuable rate annuity holder receives a decreasing income. What is even worse is when the investment fails completely, the annuity holder will be greatly at risk of losing his principal, that is, the actual amount f money he has used to buy the annuity premium.
The way to prevent this risk is to make a prudent choice of investments into which your particular variable rate annuity premium is put. You have to bear in mind that variable rate annuities are definitely tied to market performance. This way, you have to make sure that you do not have to invest money that you can not afford to lose (like your 401K).
Annuity Risks In Fixed Rate Annuities
Even in the cases of the fixed rate annuities which guarantee a steady flow of income for the contact owner regardless of how poor or how well the underlying investment performs, you should still be aware that these guarantees they give you are as strong as the company offering them. Consequently, if in case the insurer goes under, it also sinks the annuity account. The best way to mitigate this is to choose the right insurer. You have to make sure that you have to go with an annuity company that has strong fundamentals. Also, you have to ask for the full disclosure from the company where you have opted to get your annuity from. But most importantly, ensure that you also read the entire disclosure critically and understand it and its full implications.
Annuity Risk Conclusion
In general, when you have to invest your money, you have to take annuity risks into consideration, you have to make sure that you have invested it in the most reputable annuity provider so that when you retire, you will have a steady flow of income. Ensure you do your research before committing.