Could Annuities be Right for You?

Authored By: Ken Levy

I don’t recommend annuities often.  Nonetheless, they can be an appropriate investment for some investors.  Unfortunately, there may be financial sales people out there who prey upon people’s fear and misconceptions.  These days, it seems they are making the case for  every annuity as a bad investment, no matter what the circumstances.  Making a blanket recommendation to all investors is problematic. So why is it that we see so many investment advisors recommending selling annuities?

Before we deliberate about when annuities might be worth your consideration, let’s transition by starting with an investment more familiar to many readers, that is, real estate.  If I were to tell you that I plan to invest in real estate, my statement really does not reveal much because there are so many types of real estate.  I could be talking about single family homes, multifamily units, commercial property, industrial property, agricultural land, and on and on.  The same goes for annuities, as there are just too many types of annuities to put all of them in one boat.

Annuities are contracts offered by insurance companies, and are typically designed to provide investors with immediate or deferred income that is guaranteed by the issuing insurance company, tax-deferred growth, asset protection or estate planning.  One “buys” the contract with a lump sum investment or by making a series of payments.  Within each of these broader categories of annuities are a myriad of differences.  Fees are built into the contracts, and will vary with the type of contract being issued.  

Annuity strategies for guaranteed income rely on contracts that provide for either immediate or deferred income.  Through these contracts, investors can convert a portion of their investments into a predictable, pension-like stream of income, either now or in the future.  The investment is backed by the issuing insurance company.  In most cases, one can elect to receive the income monthly, quarterly, semi-annually or annually.  

Asset protection is another reason why some investors use annuities.  Fixed annuities provided a guaranteed or fixed rate of return.  With interest rates so low, many investors opt for variable annuities which allow contract owners to invest in sub-accounts. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. Since the rates of return vary from year to year, the contracts are called variable annuities.  The asset protection for a variable annuity comes via a contract rider which provides some form of insurance or guaranteed values in the event of disability, death or decline in market value.  

Estate planning, especially when trusts are involved, can make annuities worth a consideration.  The income tax bracket used for many trusts is different than those used for individuals, and trusts can hit the maximum tax rates more quickly.   Therefore, in some cases, it makes sense for a trust to purchase an annuity.  In addition to the tax benefits, some annuities allow for the purchaser to dictate how each beneficiary will receive his or her income.  This feature will appeal to investors who are worried about beneficiaries who might squander a lump sum payment.  Contracts owned by trusts may not be as flexible as contracts owned by individuals.  Nonetheless, for investors who value the guarantees that annuities offer, have trusts with high tax brackets, and want to have a say in how the income is paid to beneficiaries, the benefits of an annuity may outweigh the restrictions.  

The next time you read a blanket recommendation for all investors to avoid a particular investment, be a little wary.  Should all investors hate annuities?  By now, you will realize that is a rhetorical question.  Of course not.  To say otherwise, is simply wrong.  

Fixed and Variable annuities are suitable for long-term investing, such as retirement investing.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.  Variable annuities are subject to market risk and may lose value. 

Insurance guarantees are based on the claims paying ability of the issuing company.

Riders are additional guarantee options that are available to an annuity or life insurance contract holder.  While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing.  Guarantees are based on the claims paying ability of the issuing insurance company.

_{Ken Levy is a financial advisor with, and securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.  Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  Investing involves risk including loss of principal.  There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not protect against market risk.  Alternative investments may not be suitable for all investors and should be consider as an investment for the risk capital portion of the investor’s portfolio. Contact: 2111 W. Kettleman Lane, Ste. C, Lodi, CA 95242 or 209-263-0330.}