Annuities & InsuranceTo decide what an annuity is you first need to know there are 2 basic types.

Deferred & Immediate

Deferred:  This type of annuity allows you to grow money on a tax deferred basis.  It can be started by placing a lump sum (like a roll-over 401k or IRA) or by moving a (non performing CD) or by contributing small amounts monthly for a period of time.  The schools have been doing this for eons as a 403b Tax Sheltered Annuity.  One of the best features of a deferred annuity is you can have your money growing without any risk of principle while it’s growth compounds without taxes over that period of time.

Immediate:  This type of annuity allows you to make a lump sum contribution in exchange for a guaranteed payment plan based on your needs.

Some common examples would be:

 (* Time Certain)  Fixed period of time

(* Life Only)  As long as you are alive payments keep coming.

Or a combination of them both (*Life with Period Certain)! 

Other options are also available depending on your needs.  We use SPIA’s for many reasons but 2 main uses stand out.  Once started, a SPIA (*Single Premium Immediate Annuity) will create an income that the annuitant can not out live, this means that even if you live to age 107 your payments continue till your death, guaranteed.  Another common reason we use SPIA’s is to provide a more tax favored income stream than ordinary income or dividend income.  Based on age, these income streams could be excluded from tax by as much as 90% or more.  We use this idea a lot when trying to reduce the taxation on your Social Security’s provisional income calculation.

There are several types of Annuities; here are a few of the most common we see being used:

Fixed           Minimum interest rate guaranteed + upside

MYGA         Guaranteed rate of return multiple years

SPIA’s         Income stream driven

Index          Participate in some of market gains, no risk of principle

Split             MYGA or Fixed in conjunction with SPIA

They all serve a purpose and if used correctly can provide a great benefit.  But, like all things if used incorrectly can cause negative implications as well.  In General annuities are not a short term instrument.  They usually fit best from 3 yrs and up.  A good annuity should have at least 10% penalty free available each year and some have riders which guaranty 100% return of premium, critical illness coverage, accelerated benefits and Long Term Care.  A new unique benefit in today’s crazy financial climate is the use of income riders.  These can guaranty upwards of 6.5% – 7.0% growth on your assets as long as the goal is to pull the riders growth as income.

I have been asked many times if annuities are Good or Bad.  For me this is a pretty easy answer.  Like all financial instruments you might place your money into, the answer is “It Depends”.

To start with, I usually ask those people if Bonds are good or bad.   I have heard many, many answers form this question.  But most say they are good because they are safe.   I then usually ask, “how do you feel about Junk Bonds” it is usually at that point that people get a smile on there face as they realize that most things have some element of good and bad depending on the way you look at them.  Now this is still not to say that even Junk Bonds are bad, just that they are not necessarily safe like the word “bonds” usually makes people feel.

Annuities are very similar to that concept.  Some have long term commitments which if your time horizon is short would be a Bad thing.  Some have riders that get used when there is no need; others have no penalty free amount till the end of the term.  Like all things you place your money in the correct product must be used for the correct scenario.

So, I guess the logical question would be, what are some of the different scenario’s on might use an annuity?

Okay, fair question:

Let’s say there is a man who is retiring from many years of employment at the same job with a 401k and a small pension.  He is 65 years old and has a main focus today to have CD like returns with possible access needs in a few years of 10% or less in any given year, as he does not want to increase his income tax by drawing too much income in any single year.  He explains that he does not want risk of principle but would like some growth potential.

If he has a desire to try and keep up with inflation, we might look at a combo annuity where we put a percentage in a MYGA and a percentage in an Index.  Both would be safe for principle, similar to a CD but a good Index has potential to keep up better with inflation in the long run while the MYGA will provide steady annual growth.

Let’s say we have a lady who is 72 and has lost money for several years in the market and did not even realize that her portfolio could loose half of the principle.  Now she just wants no risk and also needs to draw an income but has concerns about running out of money.  After running several models to decide what might work, she could possibly take a small percentage and annuitize it into an income stream for her life or her life plus a period certain or even a long period certain only.  The rest could be divided up among a savings account and fixed and indexed annuity.  Probably might place part into an annuity with a ROP (return of premium) in case something unexpected happens and her needs change dramatically.

These are just 2 scenarios and all assume that the agent and annuitant have all the information required to make an informed decision.  Annuities in general are for someone who has less tolerance for risk than needed for moderate to high returns using market choices which may lose principal if the market goes down.

We encourage you to challenge us to come up with a detailed way to get or help you stay retired.  That is by far one of our favorite scenarios.  These scenarios allow us to see the difference we can make in someone’s life.  Give us a call or fill out one of our appointment request forms to begin your journey towards retirement freedom.  Or just challenge us to find any wholes in your current planning direction.  It just can’t hurt to have more than one set of eyes guiding you down your retirement path.