Help from a Certified Financial Planner
Would an annuity be suitable for you?
If so, which company should you pick, which annuity should you buy, and how much should you put into it?
After you have looked at annuity quotes, why not call a Certified Financial Planner and get some free assistance for your individual situation?
There is no obligation. There is no fee to pay. We get paid by the insurance companies, so no fee is charged.
Call 1-800-722-9053, or send us this form. We can get you just about any annuity on the market.
If you decide to buy with our help, you are getting the best rate possible for that product.
All features and benefits are set by the respective insurer only. No employee of the insurer or any producer/agent/broker can get you a "better deal" on any of these products.
What is an annuity?
An annuity is a contract with an insurance company guaranteeing a particular financial result.
Even though they may pay interest, annuities are not investments, they are written agreements containing promises. Variable annuities have an investment element, but that is done within the context of an insurance contract.
Different Reasons for Annuities:
Ways to Buy an Annuity:
'Pay Me Now' (Immediate Annuity)
Pay a lump sum and then start receiving income payments starting within the following twelve months. Income can be guaranteed for as long as you live or for a specified number of years. The size of each income payment is determined according to the annuity buyer's life expectancy and the amount of the lump sum payment made to the insurer.
'Pay Me Later' (Deferred Annuity)
Pay one lump sum only or make periodic contributions to the annuity balance, without receiving any income or making any withdrawal until a future time. The period until you receive income or withdraw money is called the accumulation phase. The period after you start taking money out, e.g., at retirement, is called the payout phase. You could take some of the money out, or take all of it out, or receive income payments for the rest of your life or for a specified number of years. Choosing income payments is called annuitization.
Taxes on interest earned would have to be paid when money is taken out. The tax advantage is that there is tax-free compounding for funds in the annuity and control over when you pay taxes because you choose the schedule for withdrawing money.
Types of Annuities:
The investment of funds is decided solely by the insurer.
If the annuity contract has an accumulation phase limited to a specific number of years (CD Type Annuity), the interest rate may be fixed for that period, or it may have a minimum guaranteed interest rate and may pay a higher interest rate if the insurer's investment results allow it. The entire amount plus interest is returned to the annuity owner (annuitant) at the end of the period (payout phase), unless reinvested in another annuity contract.
If the accumulation phase is indefinite (Traditional Fixed Annuity), the annuity will typically have a minimum guaranteed interest rate and may pay a higher rate if the insurer's investment results allow it.
If the annuity has been annuitized, i.e., regular payments from the annuity, each income payment is identical, computed according to the account balance and the insurer's current interest rate at the time of annuitization.
The interest rate in the accumulation phase is determined by a formula that specifically incorporates an equity index such as the Standard & Poor's 500 Composite Stock Price Index (the S&P 500). It dose not mean that the insurance company is investing any differently, they are just computing the interest credited to you differently than for a fixed annuity.
There is also a guarantee that the principal will never fall below the amount placed in the annuity, or a stated percentage of the amount invested, and may have a minimum guaranteed interest rate.
This type of annuity allows you the opportunity, but not the guarantee, to get a higher interest rate than a set interest amount found in a traditional fixed annuity contract. For a static or reducing index, the minimum interest (may be zero) would be paid.
The variable annuity is a mixed bag of advantages and disadvantages, no matter how aggressive or conservative your investment approach is.
There are no annual limits on contributions, unlike IRAs and 401(k)s.
You have choices as to where the money is invested. The idea is make a better return than what an insurance company provides in a fixed annuity. However, that choice is limited to a range of mutual funds selected by the insurer. So your choices are more limited compared to investing directly.
Gains within the annuity sub-accounts are tax-deferred. That is a tax-advantage. However, when funds are withdrawn from the variable annuity, gains are taxed at ordinary income rates, not the lower capital gains tax rate or dividend tax rate. That's a tax disadvantage.
Withdrawals prior to age 59½ are subject to a 10% tax penalty. Withdrawals in the first 6 years or so are subject to a surrender penalty. So that limits flexibility, especially if you change your mind and want, or need, to cash out early.
If any investment losses are realized in the variable annuity, they can not be used to offset capital gains. This is another potential tax disadvantage.
In contrast, if you buy and hold shares in mutual funds or ETFs, profit, when realized, is taxed at long term capital gains rates, which have historically been much lower than the income tax rates of the typical variable annuity buyer. In addition, capital losses can be used to offset capital gains.
If you die and there are mutual funds or stocks in your estate, the tax basis is stepped up for the benefit of the beneficiaries. However, for the variable annuity, all deferred tax liability in the annuity is inherited. This is another potential tax disadvantage for the variable annuity.
Variable annuities may have a guarantee that should you die, your heirs will receive the benefit of whatever was invested in subaccounts even if the sub-account has a loss. That's nice, but is it really worth the insurance charge especially since you are buying an annuity for retirement income, not some sort of life insurance?
The net result is that the tax deferral advantage of variable annuities is marginal. Variable annuities are both tax-advantaged and tax disadvantaged. They also charge extra expenses that direct investing does not have.
If the same funds were placed directly into a diversified portfolio of large cap stocks, or ETFs, or shares in indexed mutual funds that do not need regular rebalancing, you may achieve a close, or even better, overall tax result. Additionally, you enjoy more flexibility if you decide to change course at any time.
There is an expense disadvantage to variable annuities. Annual expenses of variable annuities are on average higher than for indexed mutual funds or ETFs. Many variable annuities have surrender charges for any withdrawal during the first few years and some may have an initial sales load charge on the fund sub-accounts.
The limited range of investment choices is an investment disadvantage. Who knows in advance which managers of aggressive growth funds selected within a variable annuity sub-account might do better than alternatives outside the annuity. So why pay the extra expenses of a variable annuity if there is no significant other advantage?
If you have retirement money to invest that exceeds the limits on 401(k) and IRA and you like to trade mutual funds several times a year, a variable annuity would provide a tax shelter from the short term gains tax that would apply to that trading. In most variable annuities, you can change investments up to 12 times annually at no charge and a small fee thereafter.
Your trading would be limited to the options allowed in the annuity sub-accounts.
On balance, for most people, little can be gained by the variable annuity and not much would lost by employing the alternatives instead. Its tax advantage in the accumulation phase is weakened by the ordinary tax treatment in the payout phase, and its operating expenses detract from any investment gains.
Who could benefit from a variable annuity?
1. The young (less than age 40), active trader in mutual funds who wants to save more than what is allowed in other retirement vehicles. Enough time may elapse, 15 to 20 years, to allow the advantage of tax-deferred trading profits to exceed the disadvantages of expense charges and regular income tax rates at withdrawal. The investment options in the annuity would have to provide sufficient choices in order to be satisfactory.
2. Asset protection from lawsuits. In many states, assets in life insurance and annuities are protected from creditors provided that the contribution can not be shown to have been made for the purpose of defrauding creditors. Professionals who are likely to be sued, like architects, doctors, lawyers, and financial planners, could have a safe haven if their errors and omissions coverage is exceeded or not applicable.
3. If you have a universal life insurance policy and decide that you do not want to continue with it, the assets could be transfered to an annuity. Any losses in the universal life policy could be used to offset gains in the variable annuity.
The Internal Revenue Code allows the surrender of one annuity and purchase of another annuity without any taxes being due if there is direct transfer of funds from one to the other according to the rules of Section 1035. By contrast, if you sell shares of stock or mutual funds to buy other shares, any gain is taxable at that time.
Surrender charges by the insurance company will still apply within the first six years or so of buying the annuity you are surrendering, according to the terms of the particular annuity.