With recent volatility in the markets being off the charts, more and more investors are looking for other alternatives with their money. People with no skin in the game can tell investors to “stay strong” or “hold for the long-term” but that doesn’t help those that are concerned with either their returns or the volatility. It sounds nice but it doesn’t help people sleep at night.

What can help investors sleep at night? One alternative that is coming back in favor and more investors are turning to is annuities. Due to the poor decade of stocks and since investors are much more careful with their money, insurance companies have had to make their annuities more attractive. 

The first thing one must know about annuities is they are not simple investments. Understanding the basics is the first step to determining if this is an option for you. The mistake I try to steer clients away from is dismissing an investment option due to a lack of understanding. Investors may be leaving potential money or safety on the table. I will go over the good and bad of different annuity options so you can have a jump start on deciding if they fit your objectives.

First you have the fixed annuity, or sometimes referred to as the CD annuity. The CD annuity is comparable to a bank CD in that it is usually set for a specific period and yield. Fixed annuities come in terms of anywhere between 3 months to 10+ years. CD annuities should be compared to bank CDs to shop the yield. The good for fixed annuities is that in many cases the yield on CD annuities will be slightly higher than bank CDs. The bad is they are much less liquid than bank CDs. To get out of a CD annuity there are usually surrender penalties. Thus if one is comfortable leaving their money in the annuity for the set term, the annuity may be a viable option. Current annuity rates range from barely above 0% to 4%.

The second option is a variable annuity which is also an insurance contract that invests in subaccounts which are tied to the market. Thus, your principal amount may go up or down, depending on the market. However, over the past decade insurance companies have become much more creative in their riders. They now have optional living benefits which provide guaranteed income (important to note, the guarantee is the insurance company itself) ranging from 4% to 6%. Thus, if one invests and chooses to start taking income out now, they can receive a guaranteed income of life on that investment plus, in some cases; the beneficiary will receive the principal amount. If they choose to wait, the principal grows at a guaranteed amount for income withdrawal purposes. The good is investors can get a higher income amount than current fixed annuities, plus the potential for increases in their portfolio amount. The bad is the fees, including the rider costs, which are associated with variable annuities. One must balance the cost of the annuity to the benefit of a set income level for life. Also, the income is guaranteed, not the market value.

Finally, there is the index annuity which I do not recommend. Index annuities try to compete with variable annuities but due to not being a security as defined by the SEC, are limited in their options. They have guarantees for income like variable annuities but most have caps on the upside return. They are usually longer-term in nature and have very high surrender penalties, relative to other annuities, if one chooses to get out early. Also, it is important to note that in many cases you do not receive a guarantee on 100% of your money but a much lower amount. They have many teaser rates and first year bonuses but the devil is in the details on those.

One thing to note about all annuities is they are treated like IRAs. Once you get into them you will be penalized if you take your money out (non-transfer) before age 59 1/2. It is impossible to cover all the opportunities and risks in a column like this. The goal is just to get you an initial understanding so you can determine if further research is warranted.

The above commentary contains opinions and analysis that are provided by the author for informational purposes only and should not be used as the primary basis for an investment decision.