An annuity is a product sold by a financial institution that is designed to allow individuals to invest in funds that are then supposed to provide a steady stream of scheduled payments in the future.
They are used as a way for seniors to secure cash flow during their retirement years.
Although an annuity is basically a tax-deferred investment, it is tied in with an insurance contract. This means that the fees can be extremely steep. For example, commissions to a broker can be as high as 5 percent, and the annual average expenses associated with variable annuity sub accounts can run more than 2 percent of assets.
For the elderly with little or no means of earning potential, those fees and commissions can mean a significant loss of potential income.
Because they are tied to market performance, the other downside is that their return rate is less certain than other types of investments seniors can make.
For example, if the stock market rises, then the annuity may increase somewhat. However, the investor has already paid out substantial fees and commissions. A drop in the stock market, of course, means a loss in the value of the annuity.
And there are some unscrupulous brokers and account executives that will recommend replacing old annuities for new ones - meaning additional fees commissions.
The bottom line is that older people who are thinking about investing in a variable annuity should proceed with caution. Those who feel as though they were victimized by a disreputable company may want to contact a reputable lawyer for advice.