Annuity Risks

As with other investments, an annuity has risks that annuity investors should be well aware of. Some people think that since an annuity is half insurance half investment, annuity risks are low and in many cases non-existent. There are plenty of risks associated with annuities. The bad part about annuity risks is that annuity risks are often hidden from investors, buried in a deep pile of annuity manual. Below are major annuity risks.

Investment risks

Unless you buy fixed and guaranteed annuities, most annuities carry investment risks. Variable annuities carry the same investment risks as mutual funds except that in an upmarket, you will not make as much money and in the downmarket, you may be protected by the insurance aspect of the annuity. However, not all annuities come with this principal protected guarantee.

Liability risks

Annuities have liability risks. When you have medial bills or other major expenses or you are being sued in a lawsuit, the risks of having an annuity is that the annuity funds are not protected against liabilities.

Inflation risks

Many annuities carry inflation risks. Some annuities such as inflation protected annuities do not but most other annuities do. The fixed payout option of an annuity often means you loses the purchasing power due to inflation risks.

Less income and lower return risks

Since when investing in an annuity, part of the fee you have to pay is to the insurance company for the insurance part of the annuity, so in a good market, you will not make as much money investing in an annuity as you would investing in straight stocks or mutual funds.

Mortality risks

For some annuities, the annuity payments cease when you die. So, if you die prematurely, you will not have benefited as much from your annuity as you would taking a lump sum withdrawal. Some annuities have provisions to solve this problem and reduce mortality risks.