Working an entire life to pay off debt, raise a family and fund a secure retirement is what most people strive for today. Most are looking forward to retirement only to later discover that social security will be depleted by the time that day comes, and that's after it's been paid into for decades of hard work! However, many are discovering life annuities to offset those loses and protect their principal investment.
A life annuity is merely a contract between an individual (annuitant) and a financial institution, most commonly an insurance company. The annuitant pays into an account and are reimbursed with monthly payments during retirement. Most annuities are paid into or purchased on a monthly basis, although the annuitant can choose to make a lump sum payment. Usually a lump sum payment is a smart move if the annutant has come into a large sum of money through an inheritance or personal injury lawsuit.
1. Who Should Consider Lifetime Annuities
An annuity is usually considered when the investor is of retirement age or close to retirement age, has a large sum of money to invest and would like to protect the principal. To support a financial plan or portfolio, to defer taxes or as a type of life insurance when a guaranteed death benefit rider is included.
2. How Will Annuities Impact Ones Tax Structure?
A life annuity can be used as a means to defer taxes of taxable gains. When the taxable gains are put into an annuity the taxes will not be due until the time of disbursement.
3. What Kinds of Fees are Involved With Purchasing Annuities?
Annuity contracts are very complicated and may have hidden fees. Hence, having an annuity specialist help avoid unnecessary fees, or at least help reduce some of those fees.
Fees such as:
- Mortality and Expense Charge (M&E): This fee pays for the insurance guarantee, commissions, selling, and administrative expenses of the contract
- Surrender Charge: Many annuities will have the "surrender charge" if cashed in early.
- Management Fees
4. What Kind of Interest Rates Can Be Earned With an Annuity?
Annuity rates vary from company to company, and are usually based on whether a fixed rate annuity or a variable rate annuity is chosen. Although a variable rate annuity may have a better interest percentage rate at the time of the contract, the rate is usually temporary, and may go down before disbursements begin. A fixed rate is much more reliable and should remain the same up to the time the contract is due to expire.
5. Does the Annuity Have a Death Benefit?
For the most part, life annuity distributions will end at the time of death. However, a joint contract or naming a beneficiary and purchasing a death benefit rider can protect from loses. A death benefit will allow payments to continue to a spouse or other dependent after the annuitant passes.
A guaranteed lifetime annuity will pay even if the annuitant dies before the annuity is set to expire. In such an instance, the remainder that is still owed will go to the named beneficiary or estate. Plus as an added bonus, should the annuitant outlive the expiration date, it will continue to pay monthly distributions until the annuitant expires.
Annuities can be a great investment when done correctly. They can protect the annuitants principal investment while creating a stable monthly stream of income. However, they should be considered with the help of an expert financial advisor. Also, avoiding small unknown or little known insurance companies is recommended, as well as using a company that offers only a long surrender period. A small unknown company may not have the equity to honor all of its contracts and in some cases may even pose the danger of bankruptcy. It stands to reason that a well known
insurance agency will have a larger client base making it much more reliable in the long run. A more well known company will also offer shorter surrender periods. A long surrender period could mean the difference between collecting payments at retirement or having to wait until well after retirement age.
Annuities can be expensive, however if the monthly payments to purchase an annuity is a viable option it can be a lucrative asset during the golden years. As with any investment, whether it be long or short term, it is well worth the additional cost to consult with a professional financial advisor who specializes in these types of investments.
