An annuity is simply a contract with an insurance company. There are several types of accounts available depending on your financial needs and goals. Fixed, indexed, immediate, deferred, variable and structured annuities are most common.
Annuities are used for growth, as savings vehicles and/or to provide guaranteed income. Oftentimes an annuity policy serves multiple purposes. They might defer gains now in order to create income during retirement. We help our clients explore all of their options.
Annuities are popular with investors for a variety of reasons. Consumers like their predictable returns, protection of principal, tax deferral and systematic income. Annuity insurance contracts are commonly used to create guaranteed future streams of income.
Annuities also offer significant tax advantages. Bank certificates of deposit and savings accounts are taxable when interest is not withdrawn. Non-qualified annuities grow tax-deferred lessening taxable income for their owners.
Interest compounds daily with many annuities helping to increase growth. When desired, principal and interest gains can be annuitized for a guaranteed stream of income during retirement. Deferred income annuities are often used to create lifetime income.
Albert Einstein said compounding interest was one of the great inventions of the modern world. He understood this simple and powerful concept was an important key to wealth accumulation.
*A qualified annuity (IRA or 403b) may require a mandatory distribution at age 70 and 1/2. You should always consult your accountant for tax advice.
Annuity accounts are flexible. Maturity terms range from just a few months to several years. An account with a longer maturity usually offers a higher interest guarantee and/or premium bonus. Many insurance companies offer 1st year premium bonuses between 5-10% for terms longer than 10 years.
Some annuities allow owners to add funds during their term without restarting the surrender period. And many contracts allow for systematic interest withdraws on a monthly, quarterly, semi-annual or annual basis without penalty. Unlike banks CDs, annuity accounts offer access to your principal during the maturity period, usually 5-10% of the account value if needed.
There are several liquidity features included with most contracts. Funds can be withdrawn systematically, as needed or if health issues arise. In fact, some policies waive surrender penalties and/or increase income payments when the owner needs long term care benefits.
There are two common myths concerning annuity insurance contracts. The first is you have little access to your principal during the maturity period. The second is the insurance company can keep your funds at passing. These are simply not true.
Another common myth is annuities have high fees. They do pay a commission to the agent, but that amount never depletes your invested principal. Most annuities work on spreads – just like bank deposits. If the account offers 4% then the internal rate of return is higher – maybe 4.25%. That extra .25% is used to run the daily operations of the insurance company and compensate the agent.
Tax deferred annuities are all around you. Many state retirement plans like Public Employee Retirement System and State Teachers Retirement System offer these contracts to their employees. Every year, billions of dollars from individuals and employers flow into annuity accounts for many of the above mentioned reasons.
Did you know:
- Total annuity assets under management are over 6 trillion dollars
- Sales of fixed income annuities have nearly doubled over the last decade
- Over 38% of households own an annuity account
- Over 40% of annuity buyers cite regular income as a primary reason for purchase
- In most states, fixed annuities are insured up to $250,000
There are several different types of annuities available for purchase. One size does not fit all. Annuity accounts can be used to diversify your portfolio, reduce taxes, provide systematic income and safeguard your estate.
The bottom line is annuity insurance contracts are appropriate in many instances. Annuities safely provide reliable returns, monthly interest, lifetime income, tax-deferred growth, safety of principal, and most importantly peace of mind.
Contact us today to learn if a policy is suitable for your investment planning.
