Tax-deferred and immediate annuities have been around for many years and are extremely flexible products. Tax-deferred annuities are very popular for the tax deferral and the compound growth. They function similiar to an IRA as they provide the same compounding factor. There are many variations of these types of annuities, including fixed deferred annuities, indexed deferred annuities, and variable deferred annuties. Each annuity has a death benefit that will pass along to a beneficiary of your choice and should avoid probate. Deferred annuities will also have a surrender charge and the length will vary per product. For example, it could be 3 years or 10 years and typically it is a decreasing surrender amount. The surrender charge is similar to a back end sales charge on mutual funds. This is an important factor when looking at an annuity, to make sure it doesn’t lock you up longer than you can afford. When you reach 59 and a half you can use up to 10% of the annuity with no penalty. A fixed annuity has a set interest rate that is locked in for a period of time. It is like a CD, but with tax deferral. An indexed annuity is an annuity that its gains are determined by some type of index like the S&P. You have a maximum gain on the upside, but you can’t typically get credited less than 0 percent. A variable annuity, is based in the market and has funds within the annuity that you choose from. It provides more upside, but has market risk and is subject to its volatility.
Immediate annuities are exactly what they sound like. An annuitant deposits money with an insurance company and the company pays them an immediate stream of money. The payments can come in monthly, quarterly, or on an annual basis. The payments can last for various lengths, depending on the annuitants needs. It can be for a period certain, like 10 years, or it can be for lifetime. An immediate annuity also has the option to provide a survivor benefit for your spouse. If you choose this option it guarantees payments will continue to your spouse if you were to pass away before payments were completed. This option can be appealing, but the payment to the annuitant will be reduced somewhat for adding this option.
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.
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 vince@paramountlifeinsurance.com.
