Annuities: Why You Shouldn't Take The Big Payout

Annuities: Why You Shouldn't Take The Big Payout

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The annuity, an often overlooked investment product, is enjoying a revival. But just because you're promised big payouts doesn't mean you should jump at the opportunity.

I was definitely surprised to hear about the comeback of annuities, so when I started taking a harder look at them, I found definite possibilities for investors to consider, along with some serious dangers.

Annuities, in case you don't know, are basically incomes that you purchase from insurance companies.  You hand over a big wad of cash in the beginning, and the insurance company pays you a fixed stable amount for the rest of your life.

For instance, the company Presidential Life offers a lifelong immediate annuity that costs you three hundred grand up front, but will pay out just under two grand a month for the rest of your life.  That means, in about fifteen years or so, you'll start making a profit on the annuity while getting a regular consistent income that isn't affected by interest rate fluctuations like CDs and bonds.

But there's a risk--that same company, Presidential Life, has a rating from AM Best, a consulting firm that rates insurance companies, of a B+.  This may not SOUND bad, but considering that the top rating is A++, a B+ suddenly looks like an F.  Especially if it's YOUR three hundred grand you just dropped with them.

See, some lower-rated companies will often offer higher payouts in a bid to get their hands on more capital to invest and of course pay their own bills with.  They've been described as the equivalent of junk bonds, which also offer higher payouts due to enhanced risk.  But with a little bit of searching and some careful planning, an annuity may be just the thing to protect your savings long term.

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