Annuities

Annuities are one of the ways to receive income when you are retired. You must be at least 59½ years old to begin withdrawals without penalties. Once this starts, you will get payments for a specific time, usually the rest of your life. Annuities are essentially insurance that can protect you from the risk of outliving your assets. One of the drawbacks of this security is that the return on investment of annuities is usually less than other investment choices.

Another drawback is that you purchase annuities from a life insurance or investment company. Setting up most annuities is expensive, those sold by traditional insurance companies through insurance agents even more so.

• Most of the cost comes from commissions and fees from those involved, which may include property assessors, accountants, actuaries, and insurance agents.
• The more professionals involved and the more complex the terms of the annuity, the more expensive the set-up charge. For example, calculating a variable annuity payment is much more complex than a fixed annuity payment and, therefore, more expensive.
• The cost will increase for each rider you add. 
• Low-cost annuities may be available through financial companies.

Some annuities will give you some choice in the investments, either by letting you or your financial advisor pick some of the investments or determining the amount of risk you want to take. Your money will get interest at a fixed rate in the accumulation phase.

Like any insurance policy, you can add any number of provisions and riders to annuities. Like any provision and rider, you need to consider the chance of needing the protection and comparing the cost of adding the provision or rider to your annuity, adding them to a different type of insurance, or taking out a separate policy. There are provisions and riders that will protect you under a number of situations. They can be divided into living and death benefits.

• Living benefit riders are any that apply to circumstances that may occur while you are alive and may include:
  • Increasing payments with inflation;
  • A minimal benefit if you have variable or indexed annuities that will protect you against any significant reductions in the payment amounts or value of the annuity due to market fluctuations;
  • Setting up specific payments, either monetary amount until the principle is gone or a specific percentage of the principle for the first few years;
  • Paying additional benefits if you need long-term care:
  • Deferring surrender charges or accelerating payouts if you are diagnosed with a terminal illness or other qualifying life events such as becoming disabled, developing serious illness, or needing long-term care (hardship rider).
• Death benefits are any that apply if you die before you have received all of your principal.
  • You can name beneficiaries or alternate annuitants.
  • They will receive any of the contract value, the amount of the premiums that have been paid, or other death benefit amount you specify.

The earnings from the annuity (capital gains, dividends, and interest) accumulate tax-free. Withdrawals and lump sum distributions from an annuity are taxed as ordinary income, even money that was withdrawn before 59½ years old for which you paid a surrender fee.

Your choices for your annuities can be quite complicated. There are 4 major things that you consider when you purchase annuities.

1. Funding – You can fund your annuity all at once or contribute over time with pre-tax dollars (Qualified Annuities) or after-tax dollars (Non-Qualified Annuities).
2. Beginning withdrawals – When you want to begin withdrawals from your annuity after you reach 59½ years old. This may or may not depend on your age when you purchase it.
3. Withdrawal amount – Your withdrawals can be the same or change over time.
4. Withdrawal duration – You can choose to receive withdrawals until a certain total amount is reached, or spread out over your lifetime or a more limited time frame.