ANNUITY BASICS EXPLAINED

At its core, an annuity is a contract between an individual and an insurance company where the individual makes payments, either as a lump sum or through periodic contributions, and in return, the insurance company provides payments for the individual to use in the future. These payments can be immediate or spread out over time, which is dependent on the type of annuity used.

There are a multitude of annuities that you may see amongst your clients, one of which could be an immediate annuity, where the payout phase begins immediately after the initial investment. This means that after the initial lump sum, your client will start receiving regular payments for the specified period. Deferred annuities have a phase where the investment (purchase cost) grows tax-deferred until you start receiving payments. Fixed annuities, on the other hand, offer a guaranteed rate of return over a specified period. They provide a steady stream of income and protect against market fluctuations. Fixed and Deferred annuities are very commonly used for retirement as they provide a stable way for your money to grow. FYI pensions are a form of annuity. And, like pensions, annuities have a value.

Variable annuities allow for investment in various accounts like mutual funds. This offers the potential for higher returns because of its variability, but also runs the risk of greater losses for that same reason. Indexed annuities, a common form of variable annuity, offer returns linked to market indexes like the S&P 500.

Some of the biggest upsides to Annuities include a source of reliable income, tax deferred growth, and the ability to pass the money on to beneficiaries at death. These benefits make them common in retirement planning.

Some of the biggest downsides to annuities are their fees, withdrawal restrictions, and the insurance component. Often the earnings from the initial investment must be taken from the annuity first and are taxable. The principal comes out last. This may place a heavier tax burden on annuities until the earnings are spent down. Some annuities have higher investment and administrative fees, withdrawal fees and restrictions. Additionally, the strength of your annuity is often tied to how well the insurance company is doing. If the insurer is not stable financially, the annuity might not be either. Lastly, there may be other income generating options available which provide for lower fees, higher returns or greater security.

By understanding the nuances of annuities and their upsides and downsides, you can better help your client get a favorable outcome in their case. At Torchlight Resolutions, we specialize in helping you untangle the web of annuities to get the result you and your client are looking for. No matter the case type; divorce, personal injury case, probate, understanding the value and use of an annuity is key.

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