Rethinking Annuities

Investment Management

Sep 29, 2021

If you ask ten investors about annuities, you will likely receive ten completely different answers. They are very misunderstood, yet opinions towards them are very strong. There are those that think they are horrible and that they can’t possibly fit into a financial plan. Then there are those on the other side that think they are the best way for retirees to invest their money. Spoiler alert: those “crash proof retirement” commercials are actually selling annuities.

The strong negative opinions about annuities have plenty of merit. They can be very confusing, and many investors find out years later that the annuity isn’t what they thought it was when they purchased it. On top of that, they carry steep penalties if you close them out before the required holding period that can be 10 years or more in some cases. Many annuity buyers don’t know what they own and when they find out, they are left with a feeling of deception.

It is worth reviewing the annuity before taking any major action. For example, the old annuity that you thought had a guaranteed 7% rate of return on it could still fit into your financial plan. While it isn’t exactly what you thought it was, the guaranteed income associated with it may have some value to you. If you don’t have a use for the benefits that you are paying for in your annuity and you are at the end of your holding period, there are more options to consider now than ever before, especially for non-qualified accounts. The funds grow on a tax-deferred basis so you can’t just determine that you don’t want it anymore and move it to an investment account. The taxes associated with that kind of move could be very significant. However, you can move it to another annuity through a 1035 exchange and continue the tax deferral.

You may be asking why you would buy another annuity after the bad impression that your first annuity purchase left you with. Well, the industry has evolved and while the benefits have come down, so have the costs. Furthermore, you don’t have to pay for the benefits you don’t need. The insurance companies have created annuities that cater to fee-based advisors and have significantly decreased their fees in the process. With the elimination of the upfront commission, the holding period is eliminated. This is creating opportunities for investors to continue the tax deferral on their money while cutting costs in half or in some cases even more without committing the money to the insurance company for another extended holding period.

Annuities are very complex. There are different types of annuities, and they aren’t all bad. This post is mainly referring to variable annuities and indexed annuities. If you have an old annuity and aren’t sure where it fits into your financial plan, take the time to review it with a professional. While you are going through the process and considering other options, it is important to remember that if it sounds too good to be true, it probably is.


Get Started