Annuities, as an investment, are very attractive on paper. They have high yields, which you can either receive right away or postpone until the agreed-upon date for withdrawal. Ergo, investors like them because they can put money into some annuities that begin paying almost right away and then stagger their postponed annuity payments out over the next several years so that they can plan ahead for larger chunks of cash. However, they have their risks too, and here is a rundown on how safe annuities are when compared to some other ways you could invest your money.
The Annuity Company Rating System
Most new investors are unaware of the fact that insurance companies that offer annuities are rated by a specialized system. If you do your homework, you will find that these companies can receive one of three ratings--secure, vulnerable or unrated. Even if the company you are looking at for a possible investment is rated as "secure," there are still several sub-ratings from just "excellent" to "superior, above all others." You will have to do a lot of digging to find the ones that are labeled "secure" and "superior" if you want to be sure your money is safe.
As for companies with a rating of "vulnerable," they are major risks, and you could lose money if the company goes bankrupt or belly-up. You could also make a monumental profit if that company turns itself around. Companies with a rating of "unrated" are either too new to be rated or far too risky to take a chance on unless you know they will do well.
Annuities vs. Other Investments
Annuities, when compared to stocks, are far safer. The risks are fewer when you invest with annuities because you are still guaranteed a certain amount of money. With stocks, you could lose your money entirely. When compared with CDs, annuities are more expensive, but their yield is often higher than the percentage rate on CDs, which can fluctuate. CDs may also require a greater waiting period for you to get the extra money, but they are only slightly safer than some types of annuities.
Some types of annuities are on par for loss and/or gain when you invest in real estate because both have the potential to lose or gain value based on the whims of consumers. Ergo, if you invest in annuities, be sure to choose the safest types and investigate the insurance companies thoroughly. Also make sure you have a very diversified investment portfolio so that if you do lose money on one investment, you may regain it through another.