4 Reasons to Buy an Annuity

Annuities are a very popular option for people who are looking for financial investments that have low risk and that can provide a secure income not only for themselves but for their spouses and even children. At Mountain Financial, we find that when people learn of the benefits of an annuity, they are eager to add annuities to their financial portfolios as one component of a comprehensive retirement strategy. Below are four features of annuities that make them very attractive.

Guaranteed Lifetime Income

One thing that appeals to almost everyone about annuities is that the insurance company promises to continue making payments to you for as long as you live, whether two years or twenty years. Sound too good to be true? It really isn’t. 

The insurance company can make this promise because it can spread investment risk across thousands of people with different lifespans as well as spread its investment income over decades. Based on sheer numbers, the insurance company is able to create a financial profile for its annuities that will virtually guarantee the profitability of these policies in the aggregate, even if any particular annuity ends up losing them money. To conceptualize it, you can think of annuities as working almost the same way as automobile insurance. Over the long run, the aggregation of premiums they collect will be higher than the amount they have to pay in claims in any given year.

In contrast, you are likely unable to hedge your risks as effectively: you have no idea whether you will outlive your assets or whether your investments will provide a sufficient return during your lifetime. By transferring your individual risk to the insurance company, you can rest easy, knowing that the insurance company has the resources to continue to provide an income for you as long as you live. 

Your Investment is Protected from Market Volatility

In retirement, you may have to rely on income from assets for support in the absence of employment earnings. If there is a market downturn, you might not have the resources to wait it out, and your assets may lose significant value or fail to produce the necessary income.

When you purchase an annuity, it is like a private pension plan. The insurance company guarantees you a fixed rate of return regardless of how the market performs. In many cases, the rate of return may be higher than you could expect from investing your funds yourself. 

As explained above, an insurance company can guarantee a fixed payment despite market downturns based on being able to aggregate its assets. Over an extended period, the market generally provides a good return. An insurance company can take advantage of this because it can diversify its investments broadly enough over a long time. Rather than risk your savings in the hope that the near-term market does not go south, why not invest in an annuity with complete confidence that your income stream will not diminish?

Possible Tax-Deferred Earnings at Lower Rates

How tax policy will affect you personally is always a challenge, and certainly, the tax ramifications of annuities or other investments are too complex to go into detail about here. But suffice it to say that your investment strategy should always consider the tax consequences of any course of action.

Depending on your situation, an annuity may be used to improve your overall tax posture, and you should discuss the options with your tax accountant. But some features of annuities have clear tax implications that can benefit you. 

For example, IRAs and 401(k) plans require you to begin taking distributions at age 72. But what if you are in a good financial position at 72 and would rather delay the distributions, particularly since you will have to pay taxes on them? Currently, IRS regulations allow you to roll these tax-deferred funds into specific types of annuities without having to pay taxes, and you can set the age at which you want to begin receiving income. This allows you not only to defer taking distributions you do not need, but if you are in a different tax bracket at that later date, you may find that the annuity payments you do receive will be taxed at a lower rate.

Annuities Operate Outside of Probate and Other End-of-Life Estate Proceedings

Many people do not realize that insurance benefits are not part of the insured’s estate, and this applies to annuities, as well. In many annuities, the annuitant arranges for the benefits to continue after death to designated beneficiaries, either as a lump-sum distribution or by continuing annuity payments to the beneficiaries for a certain period of time. When an annuitant provides for beneficiaries in this way, that benefit is not considered part of the annuitant’s estate. Consequently, the annuity policy does not have to go through probate, administered by an executor, or, in the case of an estate held by a Trust, managed by a Trustee.

These are just some of the benefits that an annuity can provide. Whether you can or want to take advantage of them will depend upon your situation, the type of annuity you purchase, and the specific features you choose. To find out more about how an annuity can benefit you, contact Mountain Financial today.