In the financial world where losses are acceptable, the concept of a hedge is critically important to understand and master. The concept of a hedge is simple. Let’s look at a quick example.
Let’s assume you have an investment, titled 'A'. The value of Investment A can rise or fall and is dependent on predictable external forces. To minimize losses in Investment A, we might want to intentionally choose Investment 'B' that is dependent on different [or opposite] external forces. That way, if the value of Investment A falls, Investment B has an independent potential to rise…offsetting some or all of the losses.
A Risk Hedge
Investment B is the hedge in our example. More specifically, it is a risk hedge. There are many types of risk hedges out there: options, mutual funds, hard assets like gold, silver, and many others. Each risk hedge has varying pros and cons to using it. Some risk hedges are cheaper or easier or more reliable, whereas others might not be. We prefer and advocate annuities as a superior asset class for market risk hedges. So why an annuity?
What is an Annuity?
In its simplest form an annuity is a contractual agreement between you and an insurance company who will hold your money for you, in return for one or more benefits, for a pre-determined period of time. An annuity is not an investment. It is a financial arrangement where you receive one or more benefits. So what are some of these benefits? Annuity Benefits include: income tax deferral, avoidance of interest rate or market losses, leveraging of earnings, minimum crediting guarantees, asset protection (in some states), income guarantees, probate avoidance.
Annuity Risk Hedge
With an annuity, you can have the best of both worlds…you can receive a vehicle that limits losses, but also receives other benefits like income tax deferral and specific guarantees not found anywhere else. If it were that simple, everyone would be using annuities as risk hedges, right? Let’s explore the problem. First, let’s start with a basic analogy. Think of an annuity as ice cream. Every ice cream has some basic ingredients, cream/milk, sugar, etc. Every annuity also shares in some basic features [see above].
What makes ice cream one of the most loved dessert choices is the limitless combinations of extra ingredients you can add. There are literally thousands of flavors. Therefore like ice cream, annuities also are derived from the same concept. There are hundreds of different flavors of annuities. So which annuity is best for your risk hedge? That’s where we come in as annuity experts. We live and die-for annuities. We know nearly every annuity flavor out in the market. And by working with us, you can add that annuity risk hedge power to your own portfolio.
There are many types of annuities to choose from. We focus on four within this website: Income Annuity, Fixed Annuity, Indexed Annuity, and Hybrid Annuity. To learn more about each of these types, please visit our Annuity Hedge Comparison page.