Upside Potential
Annuities and mutual funds can both take advantage of market increases. However, how much you benefit from the upswing depends entirely on your asset allocation and on the type of annuity or mutual funds you own.
If your variable annuity or mutual fund account is allocated to equity-based investment choices, you should experience an increase in value proportionate with your exposure. Variable annuities and mutual funds react very similarly to changes in the market, depending on your fund choices.
However, if you own a fixed annuity, any dramatic stock market gains are irrelevant because your interest rate remains fixed and predictable.
However, if you own a fixed annuity, any dramatic stock market gains are irrelevant because your interest rate remains fixed and predictable.
Downside Protection
Shielding investors from negative stock market performance is the largest advantage of annuities over mutual funds. Stock market declines directly reduce the value of mutual funds, with funds heavily weighted in equities losing the most.
Conversely, several types of annuities are available, and each of them can be enhanced with additional features and riders to more adequately suit the owner's needs and comfort level. For example, indexed annuities allow owners to participate in market gains but avoid negative results.
Bonuses
It's not uncommon for insurance companies to attract new clients by offering bonuses on new accounts. Bonuses vary greatly from one company to the next and are typically higher for larger accounts. After a period, usually several years, the bonus money is vested and belongs entirely to the annuity owner.
Mutual fund companies can't offer bonuses for new accounts, and they must rely solely on the consumer's confidence in fund performance.
Living Benefits
Many annuities contain living benefit features that allow access to money without penalty in certain situations. For example, if a stay in a nursing home is needed, many annuity contracts allow penalty-free withdrawals equal to the nursing home costs. Some annuities offer even more attractive benefits, including payments for customers who are permanently disabled, terminally ill or unemployed.
Mutual fund companies don't have the ability to provide these types of living benefits.
Death Benefits
Although all retirement accounts contain beneficiary designations and facilitate the transfer of money to heirs, annuities offer several choices that appeal to consumers. With mutual funds, which beneficiaries simply receive the value of the account at the time of death.
But annuity beneficiaries might receive more than the actual account value. Insurance companies typically offer annuity owners the option of selecting a "high water mark" death benefit, which gives heirs a benefit equal to the highest value the account ever experienced, or a "hypothetical compounding" death benefit, which calculates a steady growth of perhaps 5 percent and gives beneficiaries the larger of the theoretical amount or actual value.
Fees and Expenses
Annuities offer investors significantly greater options than mutual funds, but those bells and whistles can quickly become expensive. Unlike mutual funds, which generally have low fees, insurance companies tack on more charges for every feature. These costs decrease gains and could even eat into principal in a declining market.
It's not uncommon for the average annuity to have expenses that are more than double those of mutual funds. Additionally, annuities contain surrender charges that don't exist in mutual fund accounts. If you close your annuity too early, or if you withdraw too much money, the insurance company might penalize you by subtracting a few percentage points from your balance.
Article originally published on Zacks.com (01/06/2013)
No comments :
Post a Comment