While annuities are a somewhat controversial financial product, they may be a useful tool in certain circumstances. Here are a few considerations to help you assess if they’re right for you.
We have periodically found a good fit with the following types of annuities:
Single premium immediate annuity (SPIA)
Retirees may be especially interested in this type of annuity, which has a primary purpose of creating a guaranteed stream of income. It’s beneficial for those seeking a guaranteed payment to supplement other income sources (pension, social security, portfolio). The guaranteed payments can also provide purchasers with added comfort to maintain their portfolio equity exposure during market turbulence and bear markets.
Income can last for a guaranteed, yet limited, number of years or a lifetime, and purchasers have the option to elect a survivor benefit in exchange for a lower payment. This election allows payments to continue for a spouse, or loved one, to meet their continued income needs. There are typically no fees with immediate annuities; however, purchasers will lose all access to principal.
Variable annuity with a guarantee
This option offers tax-deferred growth and is ideal for those who are looking to maintain portfolio equity exposure, but also seek some added level of protection. Unlike SPIAs, variable annuities contain annual insurance contract fees (M&E and administrative) and investment manager subaccount costs.
For an additional fee, riders can provide income and/or death benefit guarantees, and many variable annuities provide a return of principal death benefit at no additional cost. One thing to look out for with variable annuities — surrender periods are common and can limit access to cash value without penalty (i.e., a surrender charge).
Buffered annuities are most appealing for those looking to reduce portfolio risk or those who want to get back into the market but are hesitant to do so. Like variable annuities, they also offer tax-deferred growth.
The assets invested in this type of annuity track the performance of one or more indices, and the returns are applied over a period of time selected by the purchaser (annually or over a specific number of years). Contracts permit the purchaser to select the amount of downside protection (buffer), which will absorb the initial 10%, 20%, or 30% loss (in situations where the index or indices are negative) over the period selected.
On the positive side, these typically don’t have any fees. However, as with variable annuities, surrender periods are common and can limit access to cash value without penalty.
If you decide annuities are right for you, keep in mind that income or distributions from annuities are taxed as ordinary income to the extent there is gain in the contract. They could also be subject to an additional tax penalty if withdrawn prior to 59 ½. Don’t let the reputation of annuities scare you off completely. While it’s true that they can be misused by advisors and purchased for the wrong reasons by investors, in the right situation, annuities can be helpful and provide meaningful benefits.
If you have any questions, please give us a call.
Disclosure: Securities offered through Valmark Securities Inc., Member FINRA, SIPC, 130 Springside Dr, #300, Akron, OH 44333 (330) 576-1234. Plante Moran Insurance Agency and Plante Moran Financial Advisors are separate entities from Valmark Securities.
FINRA BrokerCheck: https://brokercheck.finra.org/
The material contained in the herein is for informational purpose only and is not intended to provide specific advice or recommendations for any individual, nor does it take into account the particular investment objectives, financial situation or needs of individual investors. Consult your financial professional before making any investment decision. The information provided has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and does not purport to be a complete analysis of the material discussed.
The principal value and rate of return in a variable annuity will fluctuate due to market conditions. Therefore, at any point in time, the value of the annuity contract may be worth more or less than the owner’s actual investment in the contract. Guarantees are based on the claims-paying ability of the issuing company. For more information about the variable annuity, including its product features, charges, and expenses, please read the prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing.
Indices are unmanaged and do not incur fees, one cannot directly invest in an index.
Consult your tax professional for advice. Information provided as an incidental service to our business as (insurance professionals, financial planner, investment advisor, securities broker)