lhia logo bar
January 2016  Volume 9, Number 1        


When to Buy an Annuity…or Not

When you buy an annuity, you pay premiums to an insurer. In exchange, you’ll receive a steady stream of income for a specified period of time, which could be your entire life. Should you buy an annuity?

The right answer to that question depends on your unique circumstances and financial needs.

You Want to Protect Your Principle

Equity-based investments fluctuate in value. As people reach retirement, their ability to recoup investment losses will diminish, making it harder to withstand loss of principle amounts due to changes in the market.

An annuity protects your investment from market fluctuations. Although it also prevents your investment from increasing, a fixed annuity ensures that you receive a steady, predetermined amount of income.

If you want to protect your principle amount, consider a fixed annuity.

You Want Guaranteed Investment Returns

When you buy an annuity, the insurer makes regular payments of a predetermined amount, no matter how long you receive them. With a fixed annuity, you know what your final payout will be when you buy it. With a variable annuity, your final payout varies…as the name implies. Variable annuities allow you to invest a portion of your savings in equities, usually a selection of mutual funds. This allows your investment to increase when the market increases. However, it can also decrease when the market drops. The good news is that even these riskier investments can provide a guaranteed minimum return. You can plan your retirement based on the minimum payout, and enjoy higher returns whenever they come in!

If you want a guaranteed minimum return, consider a fixed annuity or variable annuity with the necessary minimum return.

You Want a Retirement Plan

If you want guaranteed monthly paychecks during your retirement and you don’t have a pension plan, annuities might fit the bill.

Financial planners often recommend immediate annuities for individuals who receive a lump sum retirement benefit and want an immediate stream of income. If you don’t need payments immediately but want to insure you have income in your later retirement years, you can buy a deferred annuity.

To guarantee that inflation doesn’t eat away at the value of your monthly payments, you can buy an inflation rider. These policy additions vary from company to company. Some guarantee your payments will increase by a set percentage per year, while others guarantee your payments will increase according to an index, such as the Consumer Price Index (CPI).

If you want a pension plan but don’t have one, annuities offer an alternative.

You Can’t Get Approved for Life Insurance

Having a health-related condition can make buying life insurance impossible or exorbitantly costly. If this is your case, annuities can provide some of the benefits of a life insurance policy. Both whole life insurance and deferred annuities allow you to build savings over time. Some annuities will also pay a death benefit to a beneficiary, although it’s not as much as you can obtain through life insurance.

You Want an Alternative to Long-Term Care Insurance

Given the rising premium costs for traditional long-term care policies, many people opt out of buying long-term care insurance and decide to pay long-term care costs out of pocket.

Either an immediate or deferred annuity can help pay for long-term care services.

  • Immediate annuity: If you do not qualify for long-term care insurance because of age or poor health or if you are already receiving long-term care, you can still purchase an annuity for long-term care.
  • Deferred annuity: Long-term care annuity plans are available to people up to age 85. This type of annuity creates two funds: one for long-term care expenses and another separate fund that you can use however you desire. You can access the long-term care fund immediately, but you must wait until a specified day in the future to access the separate cash portion.

You Want to Protect Yourself from Poor Financial Decisions

Some people find managing money challenging. They’re either not good at it or they don’t want to spend their retirement stressing over how they will budget their remaining money. As a long-term contract that portions out how much money you receive over a period of time, an annuity prevents you from burning through your retirement funds. If you’re a good money manager, an annuity might not be your best choice. It will simply lock away your money, preventing you from making other investment choices. (Note that taking money out of annuities before they expire results in surrender charges up to 20 percent.)

You Don’t Want to Pay Additional Fees for Your Investments

Here’s a reason not to buy annuities. Unlike mutual funds, which offer low-load and no load funds with no or low investment fees, annuities have several associated fees. Variable annuities have annual maintenance fees; in addition you might find recordkeeping and other fees, along with sales commissions.

If you buy an annuity before careful consideration, you can end up with a long-term contract, paying fees that can potentially reduce your return on investment. If the annuity does not fit your financial situation, you can pay surrender charges as high as 20 percent to cancel it before the contract’s expiration.

Invest in annuities only after you thoroughly understand your needs.

You Need Additional Tax Deferral

Annuities, like IRAs and other tax-favored retirement investment vehicles, provide tax deferral of your investment earnings. This allows your money to grow without being reduced by annual income taxes.

However, unlike other retirement investment vehicles, you cannot deduct contributions you make to an annuity. If you already have enough tax deferred-investments in place, an annuity might prove to be a wise investment choice.

Annuities are far from one size fits all products. Before buying an annuity, understand your financial situation and ask your financial advisor for more information on the annuities that might help you meet your retirement and other financial planning goals. Please contact us for an appointment.


[return to top]






In this issue:

This Just In...

When to Buy an Annuity…or Not

Wise Choices — Medicare vs. Medicare Advantage

Your Step-by-Step Guide to Personal Financial Planning in Your 40s

Annuities 101


The information presented and conclusions within are based upon our best judgment and analysis. It is not guaranteed information and does not necessarily reflect all available data. Web addresses are current at time of publication but subject to change. SmartsPro Marketing and The Insurance 411 do not engage in the solicitation, sale or management of securities or investments, nor does it make any recommendations on securities or investments. This material may not be quoted or reproduced in any form without publisher’s permission. All rights reserved. ©2016 The Insurance 411. www.theinsurance411.com Tel. 877-762-7877.