Downs Law Firm, P.C.

aging parent

What Should You Know about Annuities?

Please Share!

While they may be enjoying a new surge of popularity, the concept of annuities dates back to early Rome, when citizens would make a lump-sum payment to a contract called an annua in exchange for income payments received once a year for the rest of their lives.

There are some basic things to know about annuities.

Like all investments, there are good and bad times to buy them. Rising interest rates are making annuities more attractive to investors. Annuity sales are breaking records set in 2008 during the Great Recession. Annuities can provide retirement income. However, they are also becoming an option for workers whose employers aren’t providing pensions.

Kiplinger’s recent article entitled “Annuities” explains that before considering an annuity, there are some basics you should know.

The basic thing to know about annuities is that they are insurance contracts where you pay an insurance company to invest your money, allowing it to grow tax-deferred. In some cases, the annuity later provides an income stream, according to the contract provisions, which could cover a set time or be for life. Therefore, annuities are insurance against outliving your savings because they pay for as long as the contract provides, even if the underlying principal and any earnings have been depleted.

If you have a lifetime annuity and live a long time, you could get far more than you originally put in. However, depending on the terms of the annuity, it’s also possible that you might die before recouping your investment.

Annuities are classified in several ways, including how they’re purchased and how the funds grow. They can be variable or fixed, with different time horizons.

They can also be customized with different contract provisions known as riders. For example, an annuity could include a long-term care rider that increases your payout should you require long-term care. A rider could also have funds from an annuity go to a beneficiary should the annuity holder die before receiving the funds.

Note that these riders cost money, so the income payments will be less if your annuity pays an income stream. In other instances, an annuity may also pay a lump sum at a specified date.

For estate planning, we don’t usually transfer annuities into trusts during the contract owner’s lifetime. Forms to do so are complex. We do explore who would be the beneficiary, either an individual, group, or trust. The right answer, of course, depends on your circumstances.

We sometimes use them to structure a controlled payment for a beneficiary who may otherwise blow an inheritance quickly. Such trusts, sometimes called “Spendthrift Trusts,” ordinarily involve discretionary distributions. If a sibling is in charge of the money, it can often result in damaged relationships and resentment. The advantage to an annuity here is that the monthly check comes from a company, not my sibling, lessening ongoing resentments. It is also less expensive than a corporate trustee for simple regulated distributions to a person.

Another thing to know about annuities is that we do not give investment advice, so we would work with your financial planner to help you achieve your goals.

To explore this as an alternative, talk to us about your planning and how this type of investment vehicle can make your successor trustee’s job simpler.

Reference: Kiplinger “Annuities”