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.

Suzie Orman is a dangerous person to listen to.   She is a jack of all trades and a master of none.   Her blanket statements about life insurance are ignorant and without grounds.    She constantly says that permanent insurance is a rip off and you should always buy term life.  Why is that Suzie?  Do you understand the tax advantage of life insurance with its buildup and death benefit?

While in many cases term is the appropriate direction for people to take, it is not always the best route.   If you can afford to buy some permanent life insurance I would certainly suggest you do.   That is the only type of insurance that is guaranteed to be in force when you pass away (provided you pay the premium).   The life insurance companies love when you buy term as they pay death claims on about 2 percent of the policies.  In other words, most people pay for life insurance for years and their family never gets any benefit.

On top of the permanent nature of this type of insurance, you can accumulate money on a tax free basis in the cash value.   If accessed the proper way, you can avoid ever paying income tax on any of the build up and can supplement you retirement tax-free.  Also, the cash value can be borrowed against during the life of the policy to buy things, invest, etc.   Suzie Orman is obsessed with 401k plans and loves the tax-deferral, but tax-deferral simply means you will pay compound tax later.   In addition the government controls the rules on these types of plans, while they don’t on life insurance.   A good example is you can’t access until 59 and a half.  What if the government adjusts the age to 62 and you are simply at their mercy.

This is an expression commonly heard in the life insurance business.   Buy term and invest the difference refers to buying term life insurance and investing the difference in something like mutual funds.   The difference is between the cost of the term premium and the permanent insurance premium (whole life or universal life).

Would you get a better return on your money by putting that money in a separate account that grows at 15% annually than have the money grow tax deferred inside the life policy?  It depends on a few things, including your tax rate, liquidity, and how much you value the permanent death benefit to your family.  If you are netting a 15% return is it simple interest that you pay yearly or is it compound interest in a tax deferred account?  Tax deferral can be great, but it also leads to compound tax down the road.   Is the place you are investing the difference a liquid fund or is it locked up with early withdrawal penalties?  Does a death benefit that goes away at a certain age because it is term, provide a lost opportunity cost to your family?  What if you have don’t make 15% and actually lose on average 15%?

There is no one answer to this question and both strategies can work very well.  What we often find is that people buy term and say they are going to invest the difference but don’t.  It is important to save one way or another, so we encourage our clients to adopt a strategy that truly involves savings.