The Benefits of Annuity Insurance

All annuities, fixed or variable, share several common benefits. Here’s a summary of what annuities can bring to your retirement portfolio:

Ideal for Estate Planning
Proceeds from annuities pass directly to your beneficiaries without the delay, expense, and publicity of probate in most states. If you’ve ever had a loved one’s estate go through this time-consuming legal process, you know just what kind of advantage this is.

The Power of Tax Deferral
Because you do not pay taxes on earnings every year, your annuity is able to work harder thanks to tax-deferral. You will have to pay taxes on earnings when you withdraw your annuity’s gains, but at least you can decide when that happens.

No Contribution Limits
Contributions to other retirement savings vehicles, like 401(k)s and Individual Retirement Accounts, are strictly limited. Annuities, however, offer tremendous flexibility. You can contribute as much as you want, up to the limits imposed by the insurer, to take advantage of tax-deferral or variable accounts inside the annuity.

Flexible Payment Options
When you do decide to begin receiving payments, you can usually select one of the following methods:

Lump Sum distribution (a one-time payment)

Periodic distributions (you can take money only when you need it)

Systematic distributions (a fixed or variable amount is sent to you at regular intervals)

Annuitization (fixed or variable payments, guaranteed for the rest of your life)

Tax Control
The money inside your annuity is made up of two components — principal and earnings. Assuming your annuity was opened with after-tax dollars, you’re only taxed on your earnings.

Different distribution methods behave differently when it comes to taxes; for instance, Lump Sum, Periodic, and Systematic distributions exhaust all earnings (which are taxable) before tapping principal. Under annuitization, each payment consists of both principal and interest, spreading your tax liability evenly among payments. Through these distribution options, you have complete control over when you will pay taxes on your earnings.

Annuities are not perfect when it comes to tax control. If you should pass away while your annuity is accumulating, all deferred taxes on your growth will become due, which may reduce your annuity’s value.

Easy To Start and Maintain
Usually, a simple application, a check, and your signature begins your annuity. And, at the end of each year, you will not receive a 1099 for income earned within your annuity contract. That’s one less thing to worry about when April 15th rolls around.

Other Features
Annuities also do not offset Social Security benefits like bond, CD, and other investment income does.

Annuities are easy to establish and often come with a “free look period.” Your state of residence or the annuity contract will define a length of time (usually 20 days) where can cancel your contract if you decide it’s not right for you.

You can even exchange older, non-performing annuities into a newer fixed annuity with no tax consequences, thanks to Section 1035 of the Internal Revenue Code.

What’s not to like?