Annuities

An annuity can generally be defined as an agreement where one party makes a series of payments to another. 

Although the word “annuity” generally refers to an agreement between one person and a life insurance company, it’s possible that a trust or charity could be involved instead.

The underlying investment in an annuity can be either variable or fixed.

The main purpose is either accumulation of funds or pay-out which could be immediate or deferred.

An annuity pay-out commitment can be a fixed amount, a fixed period, or lifetime.

The premium payment for an annuity can be either single or flexible premium, or classified in multiple categories at the same time.

For instance, it’s possible for someone to purchase a non-qualified flexible premium deferred variable annuity.

Investment Earnings That Are Tax-Deferred

Unlike other investments that are taxed on a yearly basis, capital gains and investment income earned from annuities are not taxed until the money is withdrawn.

Although IRA’s and 401(k)’s are also tax-deferred, the amount you are allowed to invest in them is limited. Such a limitation does not apply to annuities. 

In addition, annuities enjoy more liberal minimum withdrawal guidelines than IRA’s and 401(k)’s.

Defense from Creditors

If you own an immediate annuity (that is, you are receiving money from an insurance company), generally the most that creditors can access is the payments as they’re made, because the insurance company now owns the money you provided.

In addition, court decisions and the statutes of some states also provide protection for part of, or the entire, payments from annuities. 

Finally, your investment in certain tax-favored retirement investment vehicles such as 401(k)’s and IRA’s is usually protected from creditors regardless of the investment vehicle – annuity or not. 

Many different types of investment options are offered by most annuity companies. These might include fixed annuities that might offer a specific interest rate like that found in a bank Certificate of Deposit (CD), or a variable annuity where your investment is entered into mutual funds – stock, bond or other types.

Wide Variety of Investment Opportunities - "Floors" Created

Recently, annuity companies have begun to create different types of “floors” to minimize the amount your investment can drop from an increasing basis point. 

For example, one feature of an annuity might guarantee that your investment can’t decline below the value shown on the recent anniversary of the policy.

Transfer Funds - Tax-Free

Annuities don’t incur tax consequences if the manner of investing is changed, unlike mutual funds or other investment vehicles that use “after-tax” money.

This feature can be very beneficial when using the “rebalancing” strategy advised by a number of financial advisors.

When rebalancing, you identify the best risk/return combination for your circumstances and move your investments from time to time to keep them in the correct proportions to enhance your position.

An Income for Life

A lifetime immediate annuity provides a series of payments to you as long as you live.

Annuity companies use “pooling”, a method unique to annuities, which enables them to guarantee an income for your entire life. The idea is that payments are derived from three “pockets”; the money you invest, the earnings from that money and the money from people in your group who don’t live long enough to reduce the pool of money. 

Providing For Your Heirs

One misunderstanding about annuities is that the annuity company keeps all of your investment if you die soon after beginning an immediate lifetime annuity. 

This situation can be avoided by purchasing a “guaranteed period” with the immediate annuity. Your purchase of a guaranteed period ensures that the insurance company will continue providing payments to your designated beneficiaries for a certain period in the event of your death.

This guaranteed period begins at the time you began receiving payments from the annuity and is generally for a period of 10-20 years. 

Finally, benefits from an annuity that are passed on to your beneficiaries avoid probate and are not controlled by your will. 

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