People tend to have lots of questions about annuities. Paul Partridge, RFC® looks at the pros and cons, and takes a firm stance against certain types.

Q: Are you a proponent of annuities?

PAUL: Frankly, some of the annuities I see are not very good. But there are different kinds of annuities.

Q: How many different kinds?

PAUL: There are 4 main types of annuities: fixed, indexed, variable and immediate. Each has its pros and cons. For example, Social Security is an annuity, and most people love that. On the other hand, variable annuities have many critics.

Q: Why is that?

PAUL: Variable annuities involve risk, offer no protection, and can have high fees, which is why we refuse to sell them.

Q: How large is the annuity market?

PAUL: According to industry data, annuity sales were around $200 billion in 2017.

Q: That’s much bigger than I would have guessed.

PAUL: Annuities aren’t for everyone. But they can play a role in a comprehensive retirement plan. A LIMRA study finds that five out of six fixed indexed annuity owners would recommend annuities to others. And according to the Insured Retirement Institute, 20 percent of investors with more than $5 million in investable assets say they plan to purchase an annuity in the next 12 months.

Q: These are facts we don’t see on the Internet. What’s behind the growing popularity?

PAUL: I saw the founder of Vanguard, Jack Bogle, on CNBC. He said, “We’re all transfixed with the movements of the stock market. But what matters for retirement savers is income generation.” That’s part of the annuity story – reliable income that grows tax deferred and is unaffected by the ups and downs of the stock market.

Q: So do people buy annuities mainly for income?

PAUL: Some for income, some for growth, some because they don’t want to risk losing money in the stock market. But probably the biggest reason is to protect against living too long and running out of money. An income annuity is a contract. The insurance company contractually commits to pay you income as long as you (and your spouse in some cases) are alive.

Q: I’ve heard that annuities are expensive. Is this true?

PAUL: When people criticize high-fee annuities, they’re often referring to the variable annuities I mentioned earlier, which may have fees of 3% to 4% or even higher.

Q: Let’s say I buy an annuity today, and get hit by a bus tomorrow. Does the insurance company keep all my money?

PAUL: Years ago, this used to be true. But today, many annuities pay a death benefit to your heirs. For example, fixed index annuities will pay you a guaranteed income stream while you’re alive –  and whatever is left over goes to your beneficiaries.

Q: Any thoughts to sum up?

PAUL: When doing your research, remember this: All financial products are tools. There are good stocks and bad stocks. Good mutual funds and bad mutual funds. Good annuities and bad annuities. You have to match the right tool for the right job. Find an experienced professional with the ability to differentiate between annuities that provide the right benefits for you, and the ones that do not.