April 21, 2009

Protect Your Capital with Annuity

The annuity in its simplest form is a contract between you and the issuing insurance company. Annuities in rare occasions can be a useful place to invest some money if you’ve exhausted all other tax-deferred retirement plan options, but you really need to do your homework. In many cases, it may be better to buy a mutual fund outright in a taxable account. There are numerous insurance companies out there feeding off of the uneducated investor by collecting surrender charges, loads, and other bogus charges. Don’t let yourself be one of those victims.

An annuity can have an impact that reaches far into your financial futureYou have to think ahead because, in most cases, you can’t reverse your decision.

Although the idea of income for life sounds great, there is one huge pitfall that most annuity salesmen forget to mention. Once you annuitize your contract, the contract is frozen - your decision is final.

Let’s look at an example:
You put $264,000 into an annuity at age 60 and accept the insurance company’s offer to pay you $1,000 per month for the rest of your life. You will have to live until age 82 to break even on the contract. If you live past age 82 the insurance company must continue to pay you the monthly check, but if you die before you reach age 82 the insurance company keeps the remaining funds. So even if you die as early as age 63, the insurance company keeps the remaining balance of your $264,000. Many investors find this hard to swallow. Nevertheless, prior to selecting payout, they have to decide whether annuitizing will be beneficial - and, ultimately, this depends on how long they think they will live.

Let’s look at the example from the article I read, this is what they are selling you, this is how they are stealing your hard earned and saved money: “For example, with interest rates recently at 4.56% on a 20-year Canada bonds, a 65-year-old who buys an annuity with a 15-year guarantee on $100,000 capital will receive ANNUAL (emphasis on me) income of $7,300 to the time of his or her death, which is the equivalent of a 7.3% annual return”

Thos sounds good?? If you do all above, investing your own money in the same bond you will have the same return AND you still have the capital!!!!!

“The example of a 75-year old who buys a 10-year guaranteed annuity on a $100,000 capital base with recent long-term interest rates. His or her ANNUAL (emphasis on me) income (and this example is not accurate as female annuitants receive higher incomes) would be 9,333

It you take $100,000 divided with 10 years gives you $10,000 per year. IF you invest that money in any kind of investment which gives you some return you are better of. It just doesn’t make sense to me why would anyone hand over their lives savings without some REAL benefit.
Take the $100,000 and invest it in a Segregated Found (if you’re uncomfortable with Mutual Founds) just because they have a guarantee so even in the down markets your money is guaranteed (and I will explain how Segregated Founds Work) at a rate of return of 6% (what is obtainable) you would have an annual income of 6,000 so you would have to use still 3,333 a year to make up the difference up to 9,333. In a 10 year period that’s about $34,000. If you deduct $34,000 from $100,000 you still have $66,000 after 10 years. If your investment has a better return you’ll have more of your capital.

This is what the bank does:
They take your $100,000 capital what you just invested in annuity, invest you money in credit cards with 18%-28% a year. Their return on one year is a min. of $18,000 and then they give you $9,333 and on top of that you loose your capital.

I really wonder who’s best is this? Yours? Or the Bank? Judge for yourself!
Although the idea of income for life sounds great, there is one huge pitfall that most annuity salesmen forget to mention. Once you annuitize your contract, the contract is frozen - your decision is final.

There are always dangers in putting all your savings into just one type of financial product. What happens if you need extra cash quickly for a medical emergency? If all your money is in an annuity, you won’t be able to get the extra money you need.

Create your own annuity from investing your savings: You could invest in very low-risk investments that will give you a guaranteed cash flow. It’s like having regular annuity income, but you don’t have to lock your money in at a lower interest rate. Just make sure you can get enough income from your investments. Even Guaranteed Investments Certificates (GICs) and government bonds are better then annuities. Take control of your capital. It’s your hard earned money. If you are not really into investing find someone you can trust to take care of your future, someone who really wants YOUR best. A financial expert can help you find the best strategy for your own situation.

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