As a licensed Personal Financial Analyst, it is apparent to me by the incredibly high number of people who own annuities, that very few people actually understand how they actually work. The simple truth is, there is only one reason to purchase an annuity; tax deferred growth. You are taxed on the money you put in to the account, but you do not pay capital gains tax on the interest you earn until you take the money out. Pretty good, right? Well, not necessarily. First of all, money you put into an IRA, 401k, TSA or any other retirement plan is tax deductible in addition to being tax deferred, meaning you don't pay tax on the money you put in either. Ergo, only if you have maxed out your retirement plans (IRA, 401K, etc)and you want to have additional savings for retirement should you invest in an annuity. That's it. If you are not putting $2000/year in an IRA and putting whatever percent your employer allows (if applicable) into a 401K, TSA or the likes, you should not own an annuity. Period. New York Life, however, will strongly encourage you to include annuities in your retirement plan. I base this on the fact that ALL of my clients with NY Life annuities had them in retirement plans. The "annuity" section of their website even reads "Read here to find out the benefits TSAs have to offer and whether you may be eligible"
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Annuities are not insurance. They can only be sold by an insurance company but (with the exception of a few minor confusing details that I'm not going to go in to here) they have absolutely nothing to do with insurance. For all intents and purposes annuities are exactly the same as mutual funds, save three differences. Growth in annuities are tax deferred, annual fees for annuities are 1% higher and, last but not least, annuities "annuitize." If you're thinking of investing in an annuity as opposed to a mutual fund for non-retirement, regular savings purposes because of the tax deferred perk, don't bother. That benefit only becomes significant with significant deposits made over extended periods of time. Short term savings: save the 1% and pick a mutual fund.
This one's going to shock you. Most annuities have mandatory annuitization at age 65. What happens is the insurance company with whom you've invested essentially says "Okay. All that money you've saved with us over the years? That's ours now. What we will do is give you a monthly allowance of $X until you die." If you've saved $100,000 and you die directly after you turn 65, after only one monthly payment of say.... $1000 guess what happens to the rest of the money. The insurance company keeps it. Let's say you don't die but you want to tap into your savings and pull out $20,000 to buy a new boat. Sorry. You get your $1000 a month and that's it. Once you turn 65 you completely lose control of your money. I'm not kidding. That's actually how it works. Then why are they sold, you ask? High commissions. New York Life does not have mandatory annuitization but you can bet that you'll need to ask your agent to erase the check in the little box next to the phrase. New York Life places what will make the company the most money ahead of the financial well being of the customer. Example: Nearly all objective financial experts agree that Term Insurance is a superior choice of coverage than equity plans (see my epinion on Term Insurance.) New York Life recently lost a huge lawsuit for wrongful termination against an agent who was fired because he was recommending Term Insurance to his prospects. Since that time they have paid millions in settlements based on false representation. I'd stay away from them.
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