Index and Whole Life Annuities for Savings and Retirement
There are many reasons why fixed index and whole life annuities have become popular as a retirement planning savings strategy. Unlike life insurance that is a safeguard against dying too soon, an annuity can be used as insurance against living too long.
Your funds within an annuity are invested by a company of your choice which may be an insurance company, independent broker, banks and other financial groups. Your funds grow in value until you begin to receive payments in a guaranteed amount and payment period. You can either take your payments over your lifetime with a guaranteed income until you die (regardless of the account value) or choose from many other flexible payment options.
Advantages of an Index or Whole Life Annuity for Retirement Planning
Annuities offer different investment options. They allow for savings growth without the risk from investing in a volatile stock market.
Annuities can pay a set amount of money monthly, quarterly or annually to meet financial needs during retirement.
They can grow as investments within a tax-deferred IRA where you only pay taxes on the distributions you receive.
- Annuities within a Roth IRA (an after-tax investment) have no required withdrawals until payments are initiated. Distributions are tax-free.
Some annuities offer a stable lifetime payout regardless of the account value or length of life.
There are many types of annuities. Some offer no fees and an attractive rate of return while protecting your investment from declining market conditions.
- Unlike IRAs and 401ks where contributions are limited, there are no limits to the amount that can be contributed. This provides greater opportunities to maximize financial growth from savings without risk.
What to Know About Annuities: Deferred and Immediate Types
All annuities are either Deferred or Immediate. Deferred annuities are in an accumulation phase where they are growing in value. Immediate annuities provide immediate payments to the account holder. The initiation of payouts, also called annuitization, provides many options for payouts.
More about Deferred Annuities
Deferred annuities are tax-deferred accounts that may be funded from a lump sum as a rollover 401k or IRA, or from contributions made by the account holder over a period of many years. Annuities can also accumulate cash value from a Roth IRA where payments are tax free.
The period of cash growth and build up is called the accumulation phase. A surrender charge generally applies if the account is terminated during this phase. However, most policies permit partial withdrawals annually without penalty. Of course, withdrawals in an IRA before the age of 59 1/2 are subject to a 10% federal income tax penalty.
More About Immediate Annuities
An immediate annuity is designed to provide immediate payments to the owner who has funded the account with a lump sum. The annuity contract defines the payment terms. There is no accumulation phase with this type of account. The payout phase of annuitization provides many payment options.
Annuity Payout Options During the Annuitization Period
Period Certain Payments allow you to choose the number of years when you receive payments. If the period is 20 years and you die after 12, the remaining 8 years of payments will be paid to your beneficiary.
- Lifetime Payments allow you to receive payments for as long as you live, regardless of the account value of the annuity. If there are remaining funds after you die, they are paid to your beneficiary.
- Lifetime Payment with Period Certain provides a combination of lifetime payments and a specific period of time. If you choose 25 years and die after 20 years, your beneficiary receives payments for 5 years. If you live more than 25 years, you continue to receive payments throughout your life.
- Joint and Survivor Payments are structured for couples. If one partner dies, the payment continues to the surviving partner.
Common Questions about Annuities
People today are more concerned about living a longer life and running out of money in their Golden years. Annuities are a popular choice as the savings version of a life insurance product. They are extremely appealing to seniors who are in or approaching retirement. Annuities are also ideal for those who do not have needs for a large death benefit for beneficiaries and want to grow their money through a safer investment over a period of many years.
Fixed annuities guarantee a fixed rate of return that is not based on market conditions or any other index. This is more attractive for people who have a very low tolerance for risk.
This type of annuity provides a return based on a market index. This might be the S&P 500. The index normally has a minimum floor of 0% as a safety net in the event of a down market. The index also has a maximum interest cap regardless of how well the market performs. Most index annuities have no fees charged to the account owner.
A whole life annuity is a financial product sold by insurance companies. There is generally a fixed and guaranteed rate of return that is determined by the insurance company selling the annuity. The policy pays monthly, quarterly, semiannual or annually to the account owner for as long as he or she lives, beginning at a stated age.
A variable annuity is a tax-deferred annuity contract that offers investors an opportunity to generate higher rates of return by investing in equity and bond sub-accounts. Unlike fixed annuities that offer a guaranteed interest rate and a minimum payment at annuitization, the income payments in a variable annuity can vary based on the performance of the sub-accounts. Variable annuities can also be associated with high fees that reduce the return on investment. Like index annuities, the account is generally subject to penalties for early withdrawals and termination.
This is a rider for annuity contracts in which annuitization is not required. This provides more opportunities to grow the account value. It is ideal for people who do not need the payments and do not want to add to their taxable income.
If you terminate your account or withdraw funds early during the accumulation phase, you could be subject to a penalty before the surrender period is up.