An income annuity is a very useful tool to create a guaranteed income stream. The period of time that you will receive the income for can be selected by the annuitant. For example, it can be an income stream that is guaranteed for the lifetime of the annuitant or for a period certain. There are also the ability to allow the surviving spouse to continue to receive the payments after the death of the annuitant. Annuities are great tools when a client needs to guarantee income to themselves and/or a spouse. Defined benefit pension plans are an annuity. They guarantee a retiree a certain amount of money annually in retirement.
The two types of annuities are immediate annuities and tax-deferred annuities. Immediate annuities are designed to create the immediate income that we are talking about above. The tax deferred annuities are built for building tax-deferred growth. In many cases is using both of these types of annuities at the same time. An example of this is for a client who has a defined amount of income that they need for a period of time and has a lump sum to invest. A portion of the money might be put in the immediate annuity for a period certain (10 years) and they other portion put in a deferred annuity. The goal would be to deliver the necessary income over that period of time and try to build the amount of the deferred annuity back to the original lump sum at that the end of the 10 years.
Life insurance and annuities have many different types and applications. If used properly and in the right context they can very valuable and used to your tax advantage. Often times, they may be used in inappropriate places and then they don’t make as much sense. For example, if a client needs to have access to all their money in 5 years, it doesn’t make sense to buy a 10 year surrender annuity product. If the client can doesn’t need the money or to draw on it for 10 years, there are some terrific deferred annuities that they can purchase.
Life insurance and annuities are both considered insurance products. They both have tax advantaged treatment and have a death benefit. Life insurance cash value (if accessed correctly) and death benefits are both tax-free. Both fixed, indexed, and variable annuities are all tax-deferred. You won’t pay any taxes until you start pulling money out of the annuity. Life insurance is different in the sense that it provides leverage for the client. A premium is paid and creates a huge leverage with the death benefit. For example, a client pays a monthly premium of $50, and the insurance company is on the hook to pay a $750,000 death benefit. On the other hand an annuity pays out what is in it to the beneficiary. For example, if your balance is $200,000 in an annuity, your beneficiary will get the $200,000.
Many annuities offer bonuses now to incentivize clients to put their money in one of their products. Some carriers offer as much as a 10 percent bonus on money put in to the annuity. We work with a lot of clients who use the tax advantage of life insurance’s cash value to provide a tax-free stream of money at retirement.
When I think of a safe place to put my money, I immediately think of a bank. Most people I speak with would probably name a bank as the safest place. Banks tend to be pretty safe and have the FDIC backing for deposits up to $250,000. With that being said over 100 banks have failed this year. If you compare that to life insurance companies, you will find that there have been no failures during that period. Life insurance companies that issue annuity contracts have very stringent reserve requirements and have reinsurance to further backstop them. Obviously, the higher the rating they receive from the financial ratings services the better.
We get questions about bank CD’s vs fixed annuities all the time. They both are very safe investments, that are perfect for safe money. The main differences, are that CD’s gains are taxable every year and fixed annuities are tax deferred. If you pulled the gains out of the fixed annuity then the gain would be taxable too. With a fixed annuity though, you have the ability for the gains to compound and you will not receive a 1099 then. If a CD and an annuity have the same interest rate, the annuity will grow more with the compounding deferred interest. Both CD’s and annuities have different term lengths that consumers can select. For example, a 3 year year, a 5 year, and a 10 year term. Generally the longer you lock in, the better rate of interest you can expect to earn.
A very popular product in this volatile market are fixed deferred annuities. These are insurance contracts that pay a guaranteed interest rate on the money deposited and grows on a tax deferred basis. Most companies have different break points and surrender periods. For example, the longer you keep your money with the life insurance company in the annuity, the higher interest rate you will receive. They also have bands that pay at higher rates depending on the deposit amount. For example, a higher interest rate might be credited to any deposit above $100,000. The different surrender periods are the periods where there is a penalty to move your money from that company to another. The surrender charge and period will decrease the longer the contract is in force and will eventually go down to 0%. It is just important to understand how many years before the annuity gets to 0%.
We always look at products for our client that have suitable time horizons for their money. For example, if the client is going to need the money in five years, then they shouldn’t buy an annuity with a ten year surrender period. On the other hand, if the client won’t need the money in five years and can wait ten, then there can be a higher with that trade off. It is also important to select a company that has a high financial rating. Obviously, it is important to know the company will take good care of your money. Look for an A rating or better with a company if you are looking at annuities. For a free analysis of your situation and what products are available please email email@example.com.