Why Consider Annuities?
When it comes to insurance products, Annuities can be a powerful component to aid in retirement planning and income protection.
With many different options to choose from Annuities provide customized ways to cover your specific situation especially as you move into retirement.
Finding the most suitable annuity product is very complicated due to the number of options that may be available to you.
Our team works with you to identify the specific annuity that is the best fit based on our review of your current situation, your plan for the next 10 years, and your retirement plans.
What are Annuities?
You may be shocked to find out that you are already familiar with the concept of an annuity.
If you play the lottery or otherwise have heard of the lottery you know that you can normally get a lump sum or several payments over 30 years.
If you opt not to take the lump sum payment the payments you will receive will be paid through an annuity.
Annuities are a long-term tax-deferred investment that is issued by an insurance company and purchased through a financial professional.
When searching for an annuity the claims-paying ability and solvency of the issuing insurance company are as important as the contract benefits.
The contract between you and the insurer provides you with a predetermined amount of income at annuitization in exchange for a premium paid to the insurer.
When you activate (annuitize) the contract you can receive annuity payments for a set period, for your lifetime, or over a combined lifetime (Spouse).
Annuities can play an important role in retirement planning by helping individuals protect against outliving their assets.
The key benefits of Annuities may include; tax savings via deferment, some protection from creditors, potential investment options, lifetime income, or a death benefit to beneficiaries.
Annuities are not without unique risks.
Examples of some of the risk an annuity contract holder may assume are
- Liquidity Risk: There is however a risk as in purchasing an annuity you may create a liquidity crisis for unforeseen events.
- Surrender Risk: There are surrender penalties that can create a loss of principal if funds are withdrawn early.
- Credit Risk: You are also taking on credit risk that the insurer will remain solvent for the period of the annuity contract.
- Inflation Risk: Inflation may be higher than the annuity contract’s guaranteed rate, which can erode purchasing power in the future.
- Market Risk: In variable Annuities, sub-accounts exposed to other securities may decrease in value due to market activity.
For retirement planning purposes it is our opinion that fixed Annuities are the safest type of Annuities when it comes to protecting your principal from market risk.
Types of Annuities
Generally, Annuities products fall into one of two major categories, deferred Annuities, and Immediate Annuities.
Annuities are further classified by the underlying investment types, their purpose, the nature of their payout structure, their tax status, and how the premium is paid.
These Annuities allow the annuitant to participate in market investments to potentially enhance growth.
The value of the account will fluctuate based on market factors and underlying investment performance.
These Annuities can involve market risk and could result in principal losses if the value of the underlying investment declines during market panics or crashes.
Variable Annuities may be suitable for those with long time horizons or those who are better able to handle or desire market exposure.
Some Variable Annuities allow you to protect your investment against loss, while still participating in potential market growth for a fee.
Fixed Indexed Annuities
These Annuities allow greater principal protection when compared to Variable Annuities in a down market and provide greater growth opportunity.
Gains can be limited by caps in participation in exchange you may receive an interest crediting floor or minimum interest rate during down markets.
These Annuities are often complex and offer the ability to adjust or make changes to participation annually.
These Annuities may also have fees that are subtracted from any potential earnings.
These Annuities may offer a guaranteed interest rate without market participation.
These Annuities help those who want a guaranteed interest rate with minimal investment risk.
Fixed Deferred Annuities may be more suitable for individuals who are desire protection instead of growth as an objective.
While they are often compared to savings certificates of deposit (CDs) they do not resemble bank products at all.
Some of the common items to note about fixed deferred Annuities when compared to bank savings products are:
- Annuities are not bank products and as such, they are not FDIC insured nor do they follow standard probate rules.
- A withdrawal from a deferred annuity may be a taxable event and in some cases will cost far more than most bank products available to individuals.
- Funds placed in a Deferred Fixed Annuity can create a liquidity event, access to these funds may be heavily restricted when compared to most bank products.
- Earnings and growth in a Deferred Fixed Annuity compound on a tax-deferred basis. (You pay taxes at annuitization, not annually on interest received.)
These Annuities offer guaranteed,4 predictable payments for life or a certain period of time.
This is accomplished by paying a large premium to the insurer in exchange for set fixed payments over a lifetime or several years with a minimum of 5 years.
You can start receiving income immediately or defer the income for up to 1 year.
These products are straightforward and easier to understand compared to other Annuity types.
If you fund a Single Premium Immediate Annuity (SPIA) with money you have already paid taxes on you’ll have a partially tax-free income.
Each payment from SPIA contracts within annuitization will consist of a principal and an earnings portion.
You would be taxed as ordinary income on any distribution of earnings.
If you are worried about RMD’s, (Required Minimum Distributions) the IRS maintains some documentation on what you should expect.
The good news is that If you purchase an immediate annuity using funds subject to RMD requirements you may exclude that amount from your RMD calculation.
Once you choose to annuitize an Immediate Annuity you are unable to withdraw or terminate the contract. (once you begin receiving income.)
We focus on Fixed and Indexed Annuity Offerings
If you are more of a conservative investor, a fixed annuity may appeal to you.
Fixed Annuities offer steady, insurer guaranteed growth.
But fixed Annuities also offer tax deferral to help your money grow faster and a lifetime income option to keep your retirement secure.
Our clients enjoy the safety of principal protection, steady tax-deferred growth, a guaranteed minimum rate of return (set annually), and guaranteed income options.
In the first year, your annuity will get off to a faster start with an additional interest rate credit where applicable.
When purchasing Annuities it is recommended that you do not utilize funds which could later create a liquidity crisis in your personal finances.
The most ideal recommendation is to fund your annuity purchase with post-tax savings during bonus or income tax refund periods.
1. Consider your individual situation and seek additional guidance from a tax advisor. Although Variable Annuities offer tax deferral, if you are considering one to fund a qualified retirement plan or IRA, you should do so for the variable annuity’s features and benefits other than tax deferral. In these cases, tax deferral is not an additional benefit of the variable annuity. References throughout this material to tax advantages, such as tax deferral and tax-free transfers, are subject to this consideration.
2. Some Insurers reserve the right to limit contributions and may choose not to allow further contributions.
3. Subject to the tax treatment of deferred Annuities, contact a tax advisor regarding the current tax treatment for deferred Annuities you may be interested in.
4. Guarantees apply to certain insurance and annuity products and are subject to product terms, exclusions and limitations of the insurer contract, and the insurer’s claims-paying ability and financial strength.
5. Some Deferred Income Annuity contracts are or may become irrevocable upon the activation of income payments, when this occurs they may no longer have a cash surrender value. Please review policy documents carefully.