Who Would Be A Good Candidate for an Annuity
Guaranteed retirement income is becoming a hot topic with the low interest rate environment and market volatility.
Those planning for retirement should evaluate their circumstance to determine whether they’re a good candidate for a guaranteed income option like an annuity. The purpose of a fixed annuity is to help with a variety of financial goals (tax deferral, principal-protected accumulation, lifetime income streams, access to funds, wealth transfer benefits, and it bypasses probate).
By definition, an annuity is a legal contract between an insurance company and the owner of the contract. It is an agreement whereby the insurance company makes specific guarantees in consideration of money being deposited with the company. An annuity can only be issued by a life insurance company and can only be sold by a currently licensed life agent.
It’s not for everyone but it is for a large portion of society because of the many benefits they offer. Some of those being:
Safety without market risk
Liquidity
No sales charges
Tax advantages
It bypasses probate due to named beneficiaries
No medical underwriting required.
Strong compound rates
Tax deferred growth
Numerous withdrawal options
Ability to stay in full control
For some annuities, in the event that the annuitant is unable to perform 2 of the 6 activies of daily living (ADLs) the company waives surrender charges or may have an income doubler.
Kinds of Annuities
In addition to those benefits of an annuity, they are also a popular choice among retirement income vehicles because they can grow tax-deferred in the accumulation phase and can provide income for life in the income distribution phase.
There are 4 types of annuities that are designed for saving funds to accumulate for the future (hence the accumulation phase mentioned above). They are a single premium deferred annuity (SPDA), flexible premium deferred annuity (FPDA), indexed rate deferred annuity, and a variable deferred annuity (VA). They are growth products where the tax on the interest earned is put off (deferred) until a later date (when money is withdrawn). SPDAs, FPDAs, and Index annuities are all about safety and guarantees. Whereas a variable annuity accepts all investment risks and it is not guaranteed, meaning the appreciation of depreciation in value is totally dependent on market condition. In addition, the 5th type of an annuity is an immediate annuity (SPIA) where it is used for withdrawing money for immediate pay out of funds (hence the income distribution phase mentioned above).
It’s important to note that Legacy Solutions, LLC does not promote variable annuities as 1) you must carry a securities license to sell them (Legacy Solutions, LLC does NOT hold a securities license) and 2) Variable annuities are not protected by State Guaranty Fund Laws where as non-variable SPDAs, FPDAs, Indexed, and Immediate annuities are.
These five types of annuities fall into two buckets: Deferred and Immediate. Deferred annuities (SPDA, FPDA, Indexed, and Variable Annuities) are purchased with either a single contribution or flexible contributions over time and provide income payments to the annuitant that begins at some future date. Immediate annuities are purchased with a one-time contribution and provide income payments to the annuitant within one year of purchasing the contract. The selection of an immediate annuity is an irrevocable decision, meaning it cannot be changed.
Finding an Annuity That’s Right for You
A licensed life agent who suggests an annuity must choose one that they think is right for you, based on information from you. They need complete information about your life and financial situation to make a suitable recommendation. The agent should ask about your age; your financial situation (assets, debts, income, tax status, how you plan to pay for the annuity); your tolerance for risk; your financial objectives and experience; your family circumstances; and how you plan to use the annuity.
Maturing CDs, checking and savings accounts, money market funds, mutual fun accounts, stocks and bond funds, IRA rollovers, treasury bonds and bills (plus many more) are all kinds of funds that could go into an annuity. Dollars earmarked for short-term needs SHOULD NOT go into an annuity. Those who need current income should consider an immediate annuity, not a deferred annuity. For those looking for one of the safest ways to accumulate dollars on a tax-advantaged basis will find the deferred annuity extremely beneficial.
If you aren’t comfortable with the annuity, ask your licensed life agent to explain why they recommended it. DO NOT buy an annuity you don’t understand or that doesn’t seem right for you. Ask about risks and decide if you can accept them (such as surrender charges and fees).
The interest (earnings) that accumulate income tax-deferred until dollars are withdrawn can help a client build substantial account for their retirement and can give them an income they cannot outlive. It’s not for everyone but it is for a large portion of society.
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