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Is an Annuity in your Future?

Annuities are insurance contracts that provide a fixed income stream for a person's lifetime or a specified period of time. An annuity can be purchased with a lump sum or a series of payments and begin paying out almost immediately or at some point in the future. Annuities are often used as a way to fund retirement.

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Pundits are all over the map when it comes to annuities.  

The fees are too high? 

An annuity in an IRA is ill-advised because an IRA is already tax-sheltered. 

Fixed annuities just are not competitive. 

Don’t trust the insurance company with your money.  

Forget about creating a personal pension payout, use dividends in a brokerage account.

These are just some of the negatives I hear all the time about annuities. So, let’s set the record straight!  

Annuities are a tool in your toolbox of financial instruments. For some, they simply will not work. For others, they are the perfect recommendation. But they are worth the conversation.

4 Popular Types of Annuities


Variable Annuities

The beauty of these instruments that your money is usually in stock market instruments such as mutual-like funds. This means your money has the potential to outpace inflation, enjoy market-like returns (minus fees), and grow until you need it.  

The major downsides are the markets go up and down, and may be down when you need your money the most and, always, fees are associated with these products and some companies can have total fees as high as 4%. Don’t forget those surrender fees and years for these fees to disappear. But you can always withdraw 10% penalty-free per year.

However, there are very creative riders that make Variable Annuities more attractive.  A GMIB Rider can offer you a base minimum growth, irrespective of investment returns, as long as this growth is used for a pension-like payout. Riders can also set a minimum pension-like payout, which may be great for a lifetime of income for you and your spouse.  And there is a rider that will put 100% of your principal back into your contract for your spouse upon your death as long as there is at least $1 left in cash value. Sometimes, a growth death-benefit is very important, especially if one doesn’t need this money during their lifetime.

The best use of a variable annuity is when you:

  • Are looking for market-like growth
  • Like the idea of actively managing the investments as there is usually no charge to change between available investments
  • Are looking for for tax-deferred growth
  • Want to offer your children the ability to “stretch” the payouts over their lifetimes
  • Want to create a lifetime of payouts for your spouse and you and understand the surrender period


Index Annuities

Imagine that you can invest in equity indexes created by an insurance carrier, have no additional fees removed, have liquidity of 10% per year and a decreasing surrender period, with no one-year ever going below a 0% floor on your investment.

You have discovered the Index Annuity!

Many of these are tied to several made-up indexes that are fairly easy to understand, but go from point-to-point, or year to year based on the day of the contract and not the calendar year. Your principal and current balance will remain the same for an entire 12-month period and then updated on the 366th day, again, never going below a 0% gain. They often can offer the same riders to help you that the Variable Annuity offers, but the potential for greater growth still lies with the VA.

The best use of an Index Annuity is for someone that:

  • Likes the idea of beating inflation
  • Likes having a floor of zero
  • Wants some participation in the equity markets
  • May desire lifetime payouts as listed above with the Variable Annuity
  • Understands the surrender period


Fixed Annuities

These are my least favorite. Basically, an insurance carrier offers you a small, guaranteed interest rate, generally beating the rate of a CD. 

This product is designed for conservative investors:

  • Who are looking to beat a CD rate of return
  • Who understands the surrender or hold period.


Immediate Annuities

This happens when an investor gives the insurance carrier a lump sum and in turn, the insurance carriers give the investor a guaranteed lifetime payout. Basically, you turn your investment into a pension payout product.

There are many companies in the annuity industry.  Make sure you do your due diligence and that you feel comfortable with the use of this tool in your financial toolbox. 

Call or email me with questions anytime.

All my best,

Elliot Kallen


Expert Insights

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