Can You Lose Money In An Annuity? Know These Two Things To Figure It Out (2024)

FAQs

Can you lose your money in an annuity? ›

The buyer of a variable annuity chooses the underlying funds (mutual funds, for instance) that will drive the performance of your annuity. Since these funds are linked to stock market performance, they are inherently risky and if the underlying funds perform poorly, you can lose money.

No, you can not lose money in a fixed annuity. Fixed annuities provide a guaranteed rate of return for a set period of time (usually 2 to 10 years). Because of their similarity to bank certificates of deposit fixed annuities are often referred to as CD Type Annuities.

Expenses Can Add Up

Layers of fees can obscure an annuity's total cost and reduce how much it pays out. Before buying an annuity, it's important to understand what you'll have to pay for all the features you want. While you'll always pay a mortality and expense fee, some fees only apply to certain types of annuities.

With an annuity—especially a fixed annuity—they know what their monthly income will be (and can budget accordingly). This saves them the task of managing their retirement portfolio, a plus for those who worry they aren't capable of managing their own portfolio.

Income annuities and fixed annuities are among the safest financial solutions available. Variable annuities, on the other hand can be volatile as they invest in equities or bonds and therefore their performance is tied to the markets.

Yes, some annuities are safe in a recession. Some annuities are even securities. Fixed annuities provide guaranteed rates of return, which means that you know exactly how much you can earn at the end of the term.

Interest Rate Risk

Interest rates are in constant flux. And, since insurance companies invest in the premiums received from annuity holders, this poses a risk if rates suddenly change. If interest rates decline, credited rates for new sales need to be lowered to reflect the new reality.

Variable Annuities

If you own one with an income-based contractual guarantee, you are holding the promise of being able to take a certain level of distributions starting at a certain age, and the insurer is required to continue letting you do that even if the value of the assets in your underlying account goes to $0.

Five-Year Rule

With the Five Year Rule, the beneficiary has several options regarding when to receive the death benefit proceeds: Take all the money out soon after the death of the owner. Take periodic payments at any time during the five-year period. Wait until the fifth year to take all the annuity proceeds at once.

What pays better than an annuity? ›

Annuities have longer durations, but bonds can be reinvested as they mature, so both financial products can be used for the long-term. In general, bonds pay a higher yield than annuities—but not always.

Most of these variable annuities have high fees. If you're less than 50 years old, you have time for markets to be volatile, and then you can make up for any type of losses or volatility, etc. If you're less than 50 years old, you should never buy an annuity of any type.

Market performance, early withdrawal penalties, and high fees can all contribute to potential financial losses. Additionally, if an insurance company defaults or goes bankrupt, the guarantees of your annuity may be impacted.

For most annuity types, the fear of actually losing your principal is minuscule. The main risk to this would be the rare situation where the company that issued your annuity goes bankrupt or shuts down. But, even in this situation, state guaranty associations would likely offer coverage and help you recoup that money.

Why are annuities a poor investment choice? Annuities can be a bad choice for some people—they have higher fees and less flexibility than some savings options. And depending on the type you choose, your heirs may get nothing after you die even if far less was paid out than you had contributed.

The annuity income benefit is paid for as long as you are alive. The company guarantees to make payments for a set number of years even if you die. If you die before the end of the period referred to as the “period certain,” the annuity will be paid to your beneficiary for the rest of that period.

However, withdrawing from an annuity is a more complex process than walking into your bank and taking out funds. Before you make a withdrawal from an annuity, it's important to review the contract and confirm if there are fees or penalties and make sure you understand any potential tax implications.