By George T. Leamon, CLTC – Lutgert Insurance
Individuals throughout the nation have billions of dollars invested in deferred annuities. And while these contracts offer countless advantages, including a guaranteed stream of income after retirement, most people simply aren’t aware of the many benefits deferred annuities have to offer.
Let’s review some of the features of a fixed annuity: Unlike a bank CD, deferred annuities are not FDIC insured. However, these accounts are usually backed by billions of dollars in the insurance company’s assets. Therefore, deferred annuities are considered safe, low-risk investments.
1. Keeping it safe – Unlike a bank CD, deferred annuities are not FDCI insured. However, these accounts are usually backed by billions of dollars in the insurance company’s assets. Therefore, deferred annuities are considered safe, low-risk investments.
2. Triple the interest – Deferred annuities offer tax deferred earnings and “triple compound interest.” In other words, these accounts earn interest on principal, interest on interest and interest on the taxes you would normally have to pay each year on a CD. What does this mean for you? Basically because of the tax deferral and triple compounding effect deferred annuities offer, you’ll have more money to spend after retirement.
3. Guaranteed minimum interest rate – Because insurance companies offer minimum guaranteed interest rates on deferred annuities, you can rest assured knowing that you’ll never lose money regardless of what’s going on around the world.
4. Competitive interest rates – Not only are you guaranteed a minimum interest rate for deferred annuities, but you may be able to receive a higher rate than on a comparable CD. Plus, with some annuities, you can lock in your current interest rate for a certain amount of time if you think rates may decrease in coming years.
5. No pesky sales charges – Unlike some other investments, deferred annuities do not tack on a sales charge when you deposit money. Every last red cent of your initial deposit stays in your account.
6. No “administration” fees – With some investments, such as mutual funds, you are charged asset management and administrative fees. You won’t have to pay any such fees with a deferred fixed annuity.
7. Withdrawal advantages – Withdrawals seems to be the most confusing and misunderstood aspect of deferred annuities. Contrary to popular belief, there are quite a few ways to access money in deferred annuities without paying a penalty, such as the following:
- You can withdraw up to 10% from your account each year without a penalty.
- If you are diagnosed with a terminal illness or need to go live in a nursing home, you can usually withdraw as much as you want without a penalty.
- You can convert some or all of your account to guaranteed income for a certain number of years.
- Some new deferred annuity products allow you to receive a payout at a guaranteed interest rate for the remainder of your life while you retain control of the principal.
8. Protected from creditors – Depending on the state where you live, the money in your deferred annuity may be protected from creditors if you file bankruptcy.
9. Sheltered from probate – In some states, your annuity is not considered a probate asset. Therefore, your deferred annuity beneficiaries will not be subject to probate fees or delays.
10. Early withdrawal charges – Although there are some charges associated with withdrawing money from deferred annuities, these charges are typically decreased over time. After a certain amount of time, charges will no longer apply. For example, once you’ve held a deferred annuity for five years, you can typically withdraw all of your money over the next five or ten years with no charges.
11. Distribution options at maturity – When a CD reaches maturity, you can either cash out or renew it for the same or different maturity period at current market rates. With a deferred fixed annuity, you may elect to withdraw your money in a lump sum or elect a lifetime income option, which provides an income stream that you cannot outlive. Or you could also let your funds continue to accumulate until a need arises.
*Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 ½. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.
George T. Leamon, CLTC – Lutgert Insurance