Investor Profile

Annuities should be purchased mainly by investors who plan to invest for the long haul (7+ years). Because of loads and fees associated with this product, investing for a shorter period usually does not make sense. Another important consideration is an annuitant's age. Because annuities receive preferential tax treatment, distributions before age 59 1/2 will be subject to a 10% IRS penalty, and potentially to any surrender charges imposed by the insurance carrier. Annuities can make sense for younger investors, but they should be prepared to keep the investment until age 59 1/2.

Most annuities are relatively conservative investments. They will generally credit an interest rate about 1.5% to 2.0% below the yield of the insurance company's portfolio. Most insurance companies invest in high grade government and corporate bonds. Knowing this, you can see that you aren't going to get rich quick by investing in an annuity. However, the slow and steady performance, combined with a tax deferred interest, make annuities a competitive risk adjusted investment vehicle. In this time of falling interest rates, it is worth pointing out that most insurance companies do have a contractual minimum level of interest that they will credit, regardless of current rates. These rates generally fall between 3.5% to 4.5% and should be considered before you buy.

For the most part, people who have not made the maximum contribution to their qualified plans (IRAs, 401(k)s, Profit Sharing, etc.) should not invest in an annuity. Because, while an annuity does offer tax deferred accumulations, the qualified plans offer that, plus a current tax deduction. The qualified plan investment will usually lead to a higher after-tax rate of return than any non-qualified annuity. Consult your tax advisor or financial consultant for more details.

This document was last modified on July 15, 1999

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