<strong>Inglewood</strong> <strong>Business</strong> <strong>Magazine</strong> | insurance Annuities vs Life, continued... Annuities can also be fixed or variable. Fixed annuities have a fixed interest rate for a specified period of time. Variable annuities are placed in a variety of stocks, bonds and mutual funds and the rate of return is dependent on the performance of those investments. Advantages of Annuities Annuities are a great way to make sure you’ll have a steady income during retirement. They’re particularly useful for people who are closest to retirement age needing to catch up. There is no annual contribution limit with an annuity. If you’ve maxed out your contributions with other investment accounts like your 401(k) or Roth IRA, you can invest as much as you want in an annuity. Annuities are marketed as being safer (less risky) than mutual funds. With a fixed annuity, the company assumes investment risks. Regardless of market performance, you are usually guaranteed a minimum interest rate. On the other hand, with a variable annuity, your returns might be higher than with a fixed annuity. If you have a variable annuity, you get to decide where you want to invest your money in the stock market. You don’t have to pay taxes on investment gains for deferred annuities. Your annuity payment will last as long as you live. For example, if during your late 60’s, you took $110,000 and bought an immediate annuity, you would receive roughly $7,000 a year every year for the rest of your life. If you lived 20 years, you would have received $140,000, which is a very good value. If you get a variable deferred annuity, your beneficiaries will receive death benefits. Disadvantages of Annuities As with any investment, annuities carry certain disadvantages you should consider before deciding on investing in one. Income from an annuity is taxed just like regular income. This means there’s a chance that your tax rate might increase from the current time and the time you want your annuity to begin paying out. Once the insurance company meets the guaranteed amount, they can keep the rest of the money. Using the example listed above, let’s say you deposited $110,000 and received $7,000 a year. However, if you died after 10 years, you would have only received $70,000. That’s a significant loss. When you die, annuity payments cannot be passed on to your relatives. You could buy an additional rider, but that would be an extra cost. The certainty of your payments is based on the financial strength of the company you buy the annuity from. If it goes belly up, so will the money you’ve put into it. That’s why your funds need to be in a separate account that is not on the company’s balance sheets. High fees are associated with annuities. These include fees for managing your account, fees paid to an advisor, and fees for trading. They’re also known for hidden fees. If you withdraw money within a specified period of time (for example, within the first five years) you will have to pay a surrender charge, a fee of around 10 percent. While deferred annuities accumulate money tax-deferred, this only applies to immediate annuities in the beginning of the payout years. If you have a fixed annuity, you don’t get to choose how the money is invested. With a variable annuity, you have more choice, but you’re subject to market volatility. Young people cannot buy annuities. Consumers usually have to be at least 40 years old to purchase a deferred annuity, and 55 years old to purchase an immediate annuity. Bottom Line Life insurance and annuities are two products designed to provide financial support later in life and to provide assistance to survivors when your life is over. There are pros and cons to both products, and also a level of risk and assumption. However, by weighing each factor carefully, you can make the right decisions. IBM 26 <strong>Inglewood</strong> <strong>Business</strong> <strong>Magazine</strong> <strong>May</strong> - June <strong>2019</strong>
<strong>Inglewood</strong> business magazine www.inglewoodbusinessmag.com <strong>Inglewood</strong> <strong>Business</strong> <strong>Magazine</strong> <strong>May</strong> - June <strong>2019</strong> 27
Change language