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.
The world today can be very litigious and the risk of getting sued is high. It is important to work with your financial advisors to create as much of a bulletproof plan as you can. While that would be the goal, it is very difficult to avoid all possible risk.
One necessity of this is to have the proper insurance planning. Two products that are protected from creditors are cash value life insurance and annuities. Often these products are used by physicians or others professionals to protect there assets with malpractice and personal liability being such a big issue in today’s marketplace. Premium financing has become very popular using insurance and annuities.
Not only do you get the creditor protection with the products but you also get tax advantages with each one. With Annuities the growth is tax deferred and with life insurance the growth in the cash value can be accessed tax free if used correctly. Annuities are not necessarily a good fit for everybody, but with the right application they can be very effective. To read more about cash value life insurance and annuities you can read about it on www.massmutual.com.
If you haven’t established a risk mitigation plan, you may want to speak with your financial advisors and take a look at how these products and others might be added to your plan.
