Disadvantages Of Fixed Rate Annuity Contracts
An often controversial insurance product is the fixed rate annuity. More often than not, the arguments for or against the product are blown out of proportion, and can leave the prospective owner completely confused as to the viability of the contract. Properly understood and implemented into a comprehensive plan, the fixed rate annuity can be an excellent planning tool and addition to a balanced portfolio.
When it comes down to it a lot can be said regarding the disadvantages of fixed annuities. It seems that there are two very clear distinct camps of thinking regarding this financial product, and you either love it or hate it. Both sides should probably ease back on the intensity and evaluate the product for what it truly is.
One of the major criticisms financial planners have of the fixed rate annuity is that the annuity has a fixed rate. And while there are a number of investments with a similar sort of behavior, the other disadvantages begin to take hold.
One of the difficulties that fixed rate annuities have is during times of inflation. If the distributions are only designed to pay out for a short time period, then inflationary pressure may not be too big of an issue. If the annuity is setup for long term income payments or even for a lifetime distribution option, inflation really begins to chip away at the purchasing power of the income. After time, these payments may not be sufficient for the owner to meet their obligations.
Combine this with the difficulty of pulling out funds if you change your mind, and many planners advise their clients to steer clear of these contracts. It is well known that annuities have quite high early withdrawal or surrender charges ties to their accounts. This makes getting out of a losing situation even more difficult.
The key to remember is that there is always going to be some give and take with financial products. Where the contract may be lacking in inflationary protection, it may make up in safety or stability. As long as you recognize that the contract may have these disadvantages, you should be able to adequately compensate for any anticipated shortcomings.