Lay aside your preconceived notions…

Many people have a lot of misconceptions when they hear the word “annuities.”  Perhaps the biggest is they immediately think of someone (the stereotype is maybe of a “lil ol’ lady”) putting down a big lump sum of money in exchange for smaller, contractually guaranteed payments.  There are annuities that work like that.  They are called “immediate annuities.”

There is another type of annuity called a deferred annuity.   Although later in the contract the owner can turn the lump sum into regular payments (in most cases) he isn’t required to.  In effect, a deferred annuity can be a nice, safe place to accumulate money.  One of the key benefits of all annuity contracts is they are tax-deferred.  Contrast that with dividends or interest which are taxable in the year they are earned in the current year whether you use them or not.

Another misconception is that if you die prematurely the annuity company gets to keep all the money in your account.  That simply isn’t true (unless you specifically opt for that over over option).  In fact one of the the advantages of an annuity is you can name beneficiaries and the account balance is paid directly to them avoiding probate.

Three Types of Deferred Annuities

A fixed annuity pays a fixed or contractually set rate of interest.  They typically can offer a slightly better rate of return than alternatives with similar (very low/nearly zero) risk.

A variable annuity is invested in securities and the owner participates in the ups and the downs of the market values of those assets.  There is the opportunity for high returns  but also loss (including principal).

A fixed indexed annuity credits interest based upon the movement in an index (such as the S&P 500®). It offers safety of principal (your account value will never decrease because the market goes down) with the potential for much better gains than in a regular fixed annuity or an interest-earning bank product like a CD.

Best of Both Worlds

In many ways the IUL is kind of the insurance “cousin” of the Indexed Annuities.  They both have at their core an indexing design.  They are very safe, with principal never at risk due to market declines yet at the same time offer some of the up side of market increases.  IULs and Indexed Annuities are both taxed advantaged.

Surrender Periods/Charges

One important consideration with Indexed Annuities is they are longer contracts (often 10+ years) with substantial penalties for taking more than contractually permitted out early (called “Surrender Charges”).  This longer time horizon is part of why annuity companies are able to offer returns that are better than some other alternatives.  Most contracts do allow you to withdraw up to 10% every year with no penalty at all & you only pay a surrender charge on the amount above the penalty free amount.  Still it is important that you fully understand the surrender charge schedule for any annuity you are considering.

Income for Life

Believe it or not a new study shows 61% of respondents were more scared of outliving their assets than they are about dying.  At some point you too may want the benefits of a regular check coming in every month (just like the Lil ol’ Lady at the top of the page).  The good news is a deferred annuity can be annuitized or turned into a regular payment.  Many top annuity carriers also offer an (optional) Income Rider that allows you to turn on the regular payments without actually annuitizing the contract.

In summary, Deferred Fixed Indexed Annuities:

  • Safety of Principal/Never lose another dime in the market
  • Potential for higher gains
  • Tax-Deferral
  • Income for Life/Don’t outlive your money

Every family’s situation is different. There are a whole lot of different indexed annuities out in the market with a myriad of different features to meet all these needs.  DaveLife works with the top companies so you have access to the best ones for your unique situation.