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Are Annuities a Bum Deal?

Annuities are now seen by many as lousy form of financial insurance. They developed a reputation as a vehicle for fat commissions for sellers of financial products. And the multi-decade decline in interest rates means that newly-priced fixed annuity plans produce smaller income streams than in the past. Moreover, unlike insurance plans, many types of annuities leave no legacy assets for your heirs.

And don’t forget that annuities can be a real drain on your liquidity. Tying up your savings now means you may be hard-pressed to fund emergency financial needs down the road. For example, a 2015 study by Fidelity Investments found that on average a couple, both age 65 and just retired, can expect to spend an estimated $245,000 on health care during their retirement.

But annuities still have a clear role to play for risk-averse and income-seeking investors. They deliver consistent payouts and can erase the sense of peaks and valleys that the stock market brings. As part of our current investment policy statement, we have growing reservations about the near-term outlook for stocks and bonds.

Moreover, annuities can smartly pay off if you live to a ripe old age (which has become much more prevalent these days). U.S. women are now expected to live 81.1 years and men are expected to live until they are 76.1 years old. But we all know of seniors that remain very vibrant well past those projected dates.

Annuities come in a range of flavors, delivering targeted levels of return and risk as well as varying starts and end dates of their payouts. Some annuities contracts end upon death, while others guarantee income for a defined period, regardless of how long you live.

The key is to avoid on annuities being sold by commission-based firms. Those types of annuity sales are what gave annuities a reputational black eye in the first place. You can get a sense of how much annuities cost and how much income they produce by visiting sites such as Immediateannuities.com.

Talk to your fee-only financial planner to get a better sense of the right kind of annuity for you—and even whether annuities make sense for your specific financial picture.