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Are annuities a good choice for you?

July 10, 2023 Article 3 min read
Authors:
Patrick Serda

While annuities can be a controversial financial planning 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.

Man sitting at a modern glass kitchen table looking out the window.Annuities are financial products available for purchase from insurance companies. The products are plentiful, and their numerous “bells and whistles” can be overwhelming for potential purchasers, making them difficult to fully understand. Because of their complexity, some advisors have misled the public and sold annuities in unethical ways in the past, causing harm to investors and the industry’s reputation. But annuities can provide valuable benefits to the right person in the right situation. However, they aren’t a “one-size-fits-all” prescription.

We have periodically found a good fit with the following types of annuities:

Single premium immediate annuity (SPIA)

This type of annuity has a primary purpose of creating a guaranteed stream of income, which can be especially helpful for retirees. It’s beneficial for those seeking a guaranteed payment to supplement other income sources (pension, social security, portfolio, etc.) The guaranteed payments can also provide purchasers with added comfort to maintain their portfolio equity exposure during periods of volatility 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. Few contracts allow for annual inflation adjustments, while most have fixed payments that don’t increase over time. There are typically no fees with immediate annuities; however, purchasers will lose all access to principal.

The amount of income is determined by the annuitant’s age, gender, and payment period. The current interest rate environment also has an impact on how much income is provided. For example, SPIAs purchased today generate significantly more income than they would have over a year ago given the same client profile.

Variable annuity with a guarantee

This option offers tax-deferred investment 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 lifetime income and/or death benefit guarantees, and many variable annuities provide a return of principal death benefit at no additional cost. Guaranteed income riders give investors peace of mind knowing they’ll have cash flow similar to a SPIA even during periods or market uncertainty, while still remaining invested. One thing to look out for with variable annuities: Surrender periods are common and can limit access to the account value without penalty (i.e., a surrender charge).

Buffered annuity

Buffered annuities (also known as structured annuities or registered index-linked annuities/RILA) 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. This strategy allows investors the ability to protect against the majority of potential losses while capturing the majority of market gains.

On the positive side, these typically don’t have any explicit fees. However, as with variable annuities, surrender periods are common and can limit access to the account value without penalty.

In conclusion

If you feel an annuity may be a good fit 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 59½.

Annuities can provide considerable value, especially during times of market volatility, but it’s important to understand what you’re getting. Don’t let the reputation of annuities deter you from considering them for your financial plan. 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.

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: http://www.finra.org/

SIPC: http://www.sipc.org/

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)

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