Annuity contract may offer a great retirement-savings option: unlike a 401(k), IRA or SEP (Simplified Employee Pension), you can generally contribute – without limits – as much as you wish while, at the same time, your investment grows on a tax-deferred basis.  While these are some of the benefits of annuities, there are a a few things to consider before you decide to buy an annuity contract. One consideration is that annuity contracts may not be ideal if you already have assets saved that can produce enough income for you and your spouse during retirement.

Historically, investments in annuities require 15 to 20 years to achieve a rate of return that exceeds other low-risk investments.

When choosing an annuity, consider your age as to the kind of income withdrawal you desire.  For example, an immediate annuity may benefit you when you:

  • are near retirement age
  • haven’t saved enough in your retirement plans to provide sufficient (lifetime) income
  • need steady retirement income in addition to social security payments and your other investments
  • worry about outliving your savings
  • have no family to support you if your savings run out
  • want your spouse to receive a steady income if you precede him or her in death.

In contrast, you may consider a deferred annuity if you

  • are under age 40
  • are a likely target for litigation by former clients, creditors or a divorcing spouse. One of the key benefits of an annuity contract is that in most states, annuities are protected from third-party claims against your assets and bankruptcy.
  • want to swap out a poorly performing universal life insurance policy [1]

Before you buy an annuity

Before you invest in any type of annuity, consider the pros and cons:

  • the issuing (life) insurance company may charge on fees. These fees may be relatively high, reducing your return on investment over time
  • calculations used by insurance companies to determine your return on investment are complex and may suppress long-term earnings potential
  • cashing in an annuity before you are 59½ of age can be costly (tax penalty) and may require surrender charges
  • some annuity contracts may require your beneficiaries to forfeit part or all of your investment when you die
  • inflation may undercut and reduce the value of a guaranteed, fixed monthly payment, especially after income taxes are to be paid.

If, after reviewing pros and cons of annuity contracts, an investment in annuities makes sense, consider the following:

  • calculate the expected payout. What is the amount of money you will receive when you start withdrawing annuity income?
  • check the strength of the issuing (life) insurance company. Make sure that you buy annuities only from financially strong companies. Ratings cam be checked at A.M. Best or Fitch Ratings.
  • verify returns. Make sure you understand how an annuity investment return is calculated. The returns on funds offered by insurance companies tend to be lower than equivalent open-end mutual funds due to higher fees and expenses.
  • review the expenses. Find out the fees you’ll be charged, including expenses and commissions If you opt for a variable annuity, look for one that charges no more than 2% in fees.
  • understand the death benefit. If you die before you spouse, what will he or she receive before deferred-annuity payments are due to begin? An extra fee may include your spouse and boost the annuity’s death benefit.
  • check the applicable surrender fees. If you choose to cancel your annuity contract, what will you be charged? Some annuities may charge a penalty between 6% to 7% in the first seven years. In addition, if you are under 59½ years of age, gains will be taxed as income, and you may expect a 10% penalty at the time of withdrawal.

Also read: [The Pros and Cons of Annuities]

Next Steps…

For more information contact us today and ask for your free no-obligation quote.We will help you explore a variety of insurance options and discounts. Call us at +1 800 645 0297 or email us. Alternatively, have an insurance-licensed Sunvalley Insurance representative contact you.

[1] Through what’s known as a 1035 exchange, the IRS allows you to transfer the cash value of one insurance product to another without tax penalties. This means that the fund can still grow tax-deferred while the losses you suffered in the insurance policy can be used to offset the annuity’s gains for tax purposes upon withdrawal.