4 Drawbacks of Purchasing a Fixed Immediate Annuity

Purchasing a fixed immediate annuity can provide you with some benefits as an investor. You will be able to create a regular source of income for yourself over an extended period of time. However, there are some drawbacks associated with purchasing a fixed immediate annuity.

1. Permanent Decision

One of the biggest problems with this type of investment is that it is a permanent decision. Whenever you invest in a fixed immediate annuity, you are giving the insurance company a large amount of your retirement dollars. At that point, you simply have to go forward with the process regardless of what happens. This means that you are basically dealing with a permanent investment decision. This is not the type of investment that you can simply liquidate your shares of and move to another type of security. You are going to be receiving payments from the insurance provider for the length of your contract.

2. Not Maximizing Returns

With this type of investment, another problem that you will run into is that you are not maximizing your potential returns. The interest rate that you are receiving is a fixed rate. This means that even if the market interest rate increases, you are still only going to receive the amount of interest that was agreed upon in your contract. By comparison, if you were utilizing a variable annuity or equity indexed annuity, you could benefit from increases in market interest rates. Although you are getting some safety with this type of interest rate, you can also miss out on valuable opportunities in the market.

3. Non-Refundable

Another problem with investing in a fixed immediate annuity is that you cannot get your money back. This type of annuity is non-refundable. If you find yourself having second thoughts about giving a large amount of money to an insurance company, there is really nothing that you can do about it in most cases. If you suddenly become aware of another investment opportunity that is much better, there is no way that you will be able to get your money back so that you can take the other investment.

4. Default Risk

As is the case with any annuity, you have to worry about a certain amount of default risk with this type of investment. You are going to be working with an insurance company in order to purchase this type of investment. There is always the chance that an insurance company could go out of business. When this happens, you may not be able to recoup your retirement dollars that you have faithfully invested with that company. This means that if you are going to take the risk of investing with an insurance company, you want to make sure that you invest in only the biggest and best companies in the industry. Be sure to check the credit ratings of the insurance companies that you are considering before making a purchase.

blog comments powered by Disqus