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Mark Cornwall: The Virtues of Annuities
Last week, I provided a warning promulgated by the California State Bar to all baby boomers — and specifically to seniors — of the pitfalls surrounding the purchase of annuities because of the fact that many purchasers have been preyed upon by unscrupulous sales people. But that doesn’t exclude annuities from being perhaps the best investment in your estate plan.
To purchase annuities, you need to speak with an expert in the field. I have again asked Brent Anderson, CLU, a local independent financial adviser and CEO of Anderson Financial Solutions, to share some insight into the unique solutions provided by annuities.
Old and Out Of Money — A Bad Combination
Mark’s article last week on annuities ended with caveat emptor (buyer beware). Annuities are really a simple concept, and yet they have been made complex by contract provisions leading to sometimes inappropriate uses. I appreciate Mark allowing me to describe the proper uses of an annuity, and there are many.
An annuity is an appropriate investment if you want to guarantee that “you won’t run out of money before you run out of breath.” Seniors and retirees fear running out of money and are vulnerable to inappropriate investment opportunities that play on those fears. The vast majority of annuity purchases are made for the proper reasons and sold by reputable, honest financial representatives.
Annuities are simply an investment vehicle that promises a stream of income for a certain period of time, often for a lifetime. Does that kind of remind you of the “good old days,” when retirees got a stream of income for a lifetime from their former employer? That was — and is — called a pension. A pension is a very desirable thing. It’s good to have money coming in every month, no matter what happens in the stock market, no matter how old you are, no matter who wins the election.
Most workers today have a personal retirement plan (401k, 403b, SEP-IRA, etc.), and often the employer will contribute to that plan, or at least match workers’ contributions. At retirement, many retirees will purchase an annuity to guarantee an income for life — in other words, to purchase a pension.
Insurance companies sell annuities, and they come in several forms with interesting variations. Some annuities are immediate, meaning the income stream starts right away. A deferred annuity is one where you put money into the annuity and it’s invested in various ways, perhaps in mutual funds, perhaps in fixed-income instruments or some combination of the two. It grows, sheltered from taxation, and then when you decide to turn on the income stream, depending on the initial source of the money, the income you receive is either taxable or partially taxable.
Traditionally, annuities are a fixed income for a lifetime. If good genes or a healthy lifestyle help you live a long life, you’ll make out like a bandit because the insurance company guarantees to pay income even if you live to be 110. But some people don’t like that deal because they fear if they die “young” they’ll have given too much to the insurance company. Today’s modern annuities often have special income guarantees, such as if you die “young” the company will continue the payments to your loved ones for at least 10 to 20 years, or perhaps for your spouse’s lifetime, or maybe until at least you and your loved ones have received back all of the money you initially gave the insurance company.
There are also annuities that promise to pay out a percentage of the plan’s balance, typically 5 percent, and they’ll guarantee that percentage payout for life and also still allow you to invest the funds. If the underlying investments grow, it’s possible your 5 percent annuity income will increase, and that might help you keep up with inflation. But if the investment values go down, the annuity company will not reduce the original income number — that still will be your “income floor.”
What’s great about variable annuities is that you haven’t given up control of the money to the insurance company. You can still access the cash if you have a need or an emergency during your lifetime. In addition, if there’s money left in the pot when you die, that money is paid to your beneficiaries, not kept by the insurance company.
What other uses are there for annuities? Some buy annuities to guarantee an income for dependents with special needs, or adult children who can’t handle money. Some leverage annuity payments into a life insurance policy so at that original person’s death, a much larger sum of money comes to the beneficiary to provide security for the survivors.
Buyer be aware: Annuities can be a useful planning tool.
— No opinion herein is a “marketed opinion” and no information provided herein can be used to avoid tax penalties for which the taxpayer would otherwise be responsible. Mark S. Cornwall has lived in Santa Barbara for more than 30 years and practiced law here for 25 years. He is accepting new clients. His book, Estate Planning: The Heroes Way for Baby Boomers, can be purchased via his Web site, www.MarkCornwall.com; Amazon.com; or locally at Chaucer’s and Borders bookstores. To schedule an appointment, contact him at .(JavaScript must be enabled to view this email address) or 805.845.7558.
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» on 11.04.09 @ 06:55 PM
As far as I am concerned, the annuities contract I purchased in my late fifties was the best investment I ever made as far as security and seeing yourself through hard times, as well as a long time. I’m now 84, and the check just keeps on coming.
» on 11.04.09 @ 10:40 PM
“Testimonial” wrote a great comment. Thank you….
There are many cases where the purchase of an annuity contract just creates the peace of mind that one needs…to know that money comes in every month, regardless…
Many of the clients I put into annuities in the early 2000’s experienced income increases up until 2008 and now, are so grateful their income did not go down when the markets crashed in 2008.
Annuities are not right for everyone, but if you desire security and guarantees in this uncertain world, you should look into annuities.
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