Are annuities a good choice for you?

Annuities are financial products available for purchase from insurance companies. The products are plentiful, and their numerous “bells and whistles” can be difficult for potential purchasers to fully understand. Because of their complexity, some advisors have misled the public and sold annuities in unscrupulous ways in the past, causing harm to investors and the industry’s reputation. But in our experience, annuities can provide valuable benefits to the right person in the right situation. However, it isn’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)

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 annuity

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.

In conclusion

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.