Annuities

In its most basic terms, an annuity is a written contract between you, the "investor," and an insurance company in which a series of regularly-spaced payments are made to you in exchange for a premium or series of premiums you have paid. An annuity is a life insurance company product - but is not life insurance.

Annuities have historically been described as useful investment tools to provide regularly timed income payments during an individual's retirement years. However, more and more savvy investors are now using annuities as an additional tool for tax-advantaged investing and/or estate planning instruments that may protect (and potentially grow) existing assets.

Annuity products are very complex, long-term investments with a large array of options and conditions that, when taken together, can significantly affect (either positively or negatively) your exposure to tax rates, inflation rate risk, loss of liquidity, opportunity costs, and market volatility. While we can discuss some of these annuity component options in broad terms here, we highly recommend that you take the time to sit down with our advisors and tax professionals for a complete evaluation of your financial position and long-term goals before entering into any annuity contract.

At their core, annuities are defined by how and when you commit your assets to the investment, and how and when you will be compensated in the future for that investment.

Immediate vs Deferred
"Immediate" annuities are usually purchased with a single lump sum premium payment, and begin paying out returns immediately (usually within 1 year). This is often an attractive option for an investor looking for an immediate and predictable income stream for future years.
"Deferred" annuities, on the other hand, require that an investor contributes money during an "accumulation period." Income payments begin many years in the future. The primary benefit of a deferred annuity is that your money from premiums accumulates interest on a tax-deferred basis. In their simplest forms, deferred annuities behave in much the same way as a traditional non-deductable IRA - but without the contribution limitations and withdrawal requirements that cap your potential deferred interest benefits.

An annuity can be a very valuable tool in your overall portfolio. They can provide a measure of financial stability over a long period of retirement. They can provide a powerful tax-deferral benefit throughout a long accumulation period, and even permit the investor to continue that benefit until the age of 85, 90, or even later. In this way, an annuity can become a very powerful estate planning and tax-advantaged investment with a fairly high level of safety when properly applied to an overall investment portfolio.

The risks are very real, but can be mitigated by well-versed financial and tax professionals. Work with someone you can trust and make sure you have a firm understanding of the costs, fees, lengths of contract, total returns, and financial stability ratings of the issuing corporation. All guarantees are based on the financial strength and claims paying ability of the issuing investment / insurance company.