An annuity is a contract between you and your insurance company. In its simplest form, money is paid to the insurance company, who then invests that money and pays out the principal and earnings back to you or a beneficiary. Annuities are tax-deferred vehicles similar to IRAs; however, contributions tend to be with after-tax dollars. When you take money out, you pay tax on the amount you’ve gained; if you’re under 59 ½ years old, there’s also a 10 percent tax penalty. Despite these expenses, having annuity strategies in place can be a conservative approach to accumulating wealth.
How does it work?
There are two distinct phases to the life of an annuity contract: the accumulation (or investment) phase and the distribution (or spending) phase.
The accumulation phase is the time when money is invested in the annuity. Investing can occur as a lump sum or via a series of payments; payments can be equal size over a number of years or may consist of a series of variable payments.
When developing an annuity strategy, it's important to know that there are two options for receiving distributions from an annuity contract. One option is to withdraw earnings from the contract; it can be withdrawn in one lump sum or over a period of time via regular or irregular payments. Given these options, you continue to have control over the money that’s been invested in the annuity. However, note that if both the principal and earnings are withdrawn from the annuity, there’s no guarantee that the funds will last for your entire lifetime.
The second withdrawal option is the guaranteed income option. The annuity issuer promises to pay a specific amount on a specified basis (monthly, yearly, etc.). You can receive a fixed amount for each payment period or a variable amount, and you can choose to receive the income stream for your entire lifetime or for a specific time period. The amount received for each payment period will depend on how much money is in the annuity, whether earnings credited to the account are fixed or variable, and the age at which you begin the annuitization phase. This option comes at an extra cost and the guarantees are based on the claims paying ability of the individual insurance company. Annuities are garnering client interest
Although we haven’t always been advocates of annuities, especially variable annuities, clients are becoming increasingly interested in these vehicles. Variable annuities, for example, can be a great way for investors to venture back into the market as part of a diversified portfolio, as they allow investors to take advantage of equity market returns when the market is performing well and may reduce risk on the downside when market performance is poor. Plante Moran Insurance Agency team can help you through annuity consulting and strategy development to determine if an annuity is the right vehicle for you. We can also help you with life insurance reviews
, long term care and other insurance concerns.Plante Moran Insurance Agency is a member of the FINRA. Securities are offered through Valmark Securities, Inc., an unaffiliated securities broker-dealer. Member FINRA and SIPC.