Happy National Annuity Awareness Month!

I don’t know who the decision makers are with regard to the days, weeks, or months we recognize, but aren’t you excited that somehow annuities made it on the list for national recognition – for an entire month! It’s 30 days of constant celebration in my office! (I am joking.) My wife, Wendy, teaches sixth grade in the Gulf County school system, and she is certainly celebrating “no more school for the summer” for the months of June and July. Now that’s something to celebrate!

But, seriously, annuities can be good solutions for the right situations and are suitable for long-term investing, such as retirement investing. An annuity is basically a financial contract with an insurance company. The term “annuity” technically means “a stream of payments,” but many people save or invest money into annuities and never turn on the switch to start the stream of payments. Annuities allow investors to avoid annual income taxation on the increase in value. Taxes are due when money is withdrawn from the contract. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. 

There are basically three types of annuities: fixed, indexed, and variable. Guarantees offered on any annuities are based on the claims paying ability of the issuing company. 

A fixed annuity is the simplest form of annuity. An insurance company says, “Deposit your money into our annuity and we will pay you XYZ% per year for XYZ number of years. If you take the money out before the agreed-upon term, you will have to pay a penalty.” 

An indexed annuity is the next step up in risk/reward. Basically, an insurance company will allow an investor to select some sort of benchmark (an index) for gauging investment returns, and, if that index increases in value, the insurance company will allow that investor to obtain part of that return (but not all of it). If that index actually decreases in value, the investor will not suffer any loss. In short, if the index goes up, you get some of the return, but if it goes down, the value will not decrease. These annuities typically do not allow investors to receive the dividends accumulated on the securities represented by the index. 

The third form of an annuity is a variable annuity, and it is basically an investment account with an insurance company that can go up or down in value based upon the performance of the selected investments. They are subject to market risk and may lose value. 

Contracts with insurance companies have a few key benefits. First, any increase in value that remains in the contract avoids current taxation until withdrawn. This allows the investor to receive the benefits of compounding on money that normally would be sent to the IRS for annual taxes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. 

Second, death benefits can avoid probate if the beneficiaries are correctly named. It is not wise to list one’s estate as beneficiary, as that is a ticket straight back into probate. Third, an income stream can be guaranteed by the insurance company for a specific amount, term, or lifespan. At no cost, I would be happy to help you review your current annuity – the pros, cons, and costs as well as the annuity structure of annuitant, owner, and beneficiaries. Happy National Annuity Awareness Month!

Gulf County resident Walter L. Woodrick is a certified financial planner practitioner, and the author of two books. His website is WoodrickFinancial.com. You can text Walter at 850.724.1369. Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. 585042-1