Bar News - June 22, 2007
NHBA Insurance Agency: Annuities – A Primer
By: Suzanne Morand
An annuity is a contract between an individual and an insurance company. The individual makes a lump-sum payment or a series of payments and the insurer agrees to make periodic payments to the individual immediately or at some future date. Attractive features of an annuity include tax deferral in investment earnings, protection from creditors, an array of investment options, tax-free transfers among investment options, lifetime income and benefits to heirs.
Annuities can be classified by:
- Nature of the underlying investment – fixed or variable.
- Primary purpose – accumulation of pay-out (deferred or immediate).
- Nature of pay-out commitment – fixed period, fixed amount or lifetime.
- Tax status – qualified or non-qualified.
- Premium payment arrangement – single premium or flexible premium.
Reasons to purchase an annuity
If you are in the “saving money” stage of life:
- An annuity can help you meet your retirement income goals. Contributions to employer sponsored retirement plans and IRAs are limited and may not add up to enough for the retirement income you need.
- An annuity can help you diversify your investment portfolio. Fixed annuities offer a unique asset class – an investment that is guaranteed not to decrease and that will actually increase at a specified interest rate.
- An annuity can help you manage your investment portfolio. Experts advise that you routinely “rebalance” your assets by moving funds from investments that have grown faster to the ones that have grown more slowly. If you do this with mutual funds, you pay capital gains taxes; if you do it in a variable annuity, you don’t. When you eventually withdraw money from the annuity, you then pay tax at the ordinary income rate.
If you are in the “need income” state of life:
- An immediate annuity can help protect you against outliving your assets. Social security and defined-benefit pension plans pay retirement income for life but the only other source of income available that continues indefinitely is an immediate annuity.
- An annuity can also help protect your assets from creditors. Generally, the most that creditors can access is the payments from an immediate annuity as they’re made, since the money you gave the insurance company now belongs to the company.
Next time, we’ll look at the various types of annuities available.
If you have questions regarding annuities or other life insurance products, please contact Sue Morand of NHBA Insurance Agency at 866-642-2292 or via e-mail at firstname.lastname@example.org.