Are Annuities Potentially Safer than Mutual Funds?

AW Admin |

The short answer is potentially, in a number of ways. However, rather than just take it at face value, a closer examination of the two different types of investments will reveal how they differ in the number of safety investors should expect from each. 

For the average investor, mutual funds are an exceptional investment vehicle, as much for their potential to generate solid market returns as for the access to the markets.  They provide diversification and professional management which goes a long way to mitigate the risk that would otherwise be too great for the average investor to assume.  With the wide variety of mutual funds from which to choose, investors can create a complete portfolio that is balanced and diversified to their specific risk tolerance and investment preferences. 

But, the reality is that mutual fund investors risk the loss of their investment value.  Except for money market mutual funds, which invest in very short term debt instruments, mutual funds invest in stock or bond portfolios which are all subject to the price fluctuations of the markets.  Technically, mutual fund investors won’t lose any money unless they sell their shares after they have declined in value, but they must endure the possibility that their investment may not recover its value within the timeframe they require.

Fixed Annuities

Fixed annuities may be considered the safest of all annuities. With minimum guaranteed rates of return and safety of principle as their primary objective, fixed annuities provide the greatest degree of protection for investors. Life insurance companies back the principle with their general account assets which are invested in high quality debt securities.  Life insurers are also required to maintain very strict reserve and surplus ratios which are scrutinized by state regulators.

Variable Annuities

Variable annuities share one primary characteristic with their mutual fund cousins and that is their managed separate accounts consisting of stock and bond portfolios.  As such, these accounts can lose value in declining markets, and, as with a mutual fund, if a variable annuity is surrendered during a period of declining markets; it is possible for an investor to lose money. 

Although the accumulation accounts are managed separately from the general account of the life insurer, it is the assets of the general account that back the return of principle death benefit. Many variable annuities include a minimum rate guarantee that can assure investors that their money will grow even in a declining market.

Additionally, variable annuity contracts offer guaranteed benefit options (for an additional charge) that guarantee a minimum death benefit, or a “rolled up” death benefit that includes a growth element.  Contract owners can also purchase options that guarantee a minimum income level or income tied to a certain growth rate.  While many of these guarantees increase the cost of owning a variable annuity, they provide protections not found in mutual funds.

*There is a surrender charge imposed generally during the first 5 to 7 years that you own the contract.  Withdrawals prior to age 59 ½ may result in a 10% IRS tax penalty, in addition to any ordinary income tax.  The guarantee of the annuity is backed by the financial strength of the underlying insurance company.  Investment sub-account values will fluctuate with changes in market conditions. Investors should consider the investment objectives, risks and charges and expenses of the variable annuity carefully before investing. An investment in a variable annuity involves investment risk, including possible loss of principal.  Variable annuities are designed for long-term investing.  The contract, when redeemed, may be worth more or less than the total amount invested.  Variable annuities are subject to insurance-related charges including mortality and expense charges, administrative fees, and the expenses associated with the underlying sub-accounts.  The prospectus contains this and other information about the variable annuity. Contact [Registered Representative name] at [Registered Representative address] or [Registered Representative phone number] to obtain a prospectus, which should be read carefully before investing or sending money.

**Annuities guarantees are subject to the claims paying ability of the insurance company**

Fixed Indexed Annuities

Indexed annuities are unique for their ability to provide investors with a return that is tied to stock market returns, yet have guarantees and protections that are closer to those of fixed annuities.  The yield that is credited to the accumulation account is based on a percent of the actual gain in the stock index to which the annuity is linked.  The insurer caps the upside potential, so an investor will not participate in the full percentage gain of the index, but in return, the insurer guarantees that the account will earn a minimum rate during when the index declines.

The reset feature of fixed index annuities, in which the account values are reset each year to lock in the previous year’s gain, ensures that not only is the principle protected, but that any yearly gain is also protected and forms the new basis of the account.

*Index annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index.  Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways.  Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity.  Investors are cautioned to carefully review an index annuity for its features, costs, risks and how the variables are calculated.

Safety at What Price?

Mutual funds and annuities both have their advantages and disadvantages if you have questions regarding how these products can fit into your financial goals consult your Financial Advisor.

 *This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2024 Advisor Websites.

*Investing in mutual funds is subject to risk and loss of principal. There is no assurance or certainty that any investment strategy will be successful in meeting its objectives