Annuities? Few would argue that the promise of guaranteed income for life has an encouraging ring to it. Indeed, there is a product offered by insurance companies that does offer such a prospect. The deal is straightforward. You give the insurance company your money and the company agrees to pay you a stated rate of return for a specified period of time, often as long as you live. That’s the typical model of a fixed annuity. From a business perspective, the insurance company is betting that the return on the investment it is making with the funds you are transferring to them will exceed the regular payments it is making to you. If the specified term is however long you will live, the company ends up ahead if you die early. If you outlive the expected term, you are the winner. With a fixed annuity, the money is gone once it’s transferred. What’s more, the rate of return specified in the agreement is usually fixed. This may or may not be reset over time. In
Investment and economic observations by N. Russell Wayne, CFP, MBA. Mr. Wayne is the president of Sound Asset Management, inc. and former Managing Editor of The Value Line Investment Survey.