How annuities can fit within a personal investment portfolio

Annuities are a means of putting money to work in a low-risk vehicle that offers a number of structure options. They offer meaningful tax advantages compared to other investment vehicles, and can diversify an investment portfolio and generate income for the annuity owner or their beneficiaries. Further, different annuity types can be uniquely structured to suit an individual’s goals. 

“Some people use immediate annuities to fund buy-sell agreements, provide lifetime income, as an alternative to taking the required minimum distribution, and as an alternative to investment vehicles that are subject to risk with each market swing,” says Craig Berson, President and CEO of Berson-Sokol Agency Inc.

Smart Business spoke with Berson about annuities — the types, their benefits, how they’re used and the importance of effectively structuring them.

What is an annuity?

An annuity guarantees a predetermined interest rate over a predetermined period of time. Generally speaking, the longer the term, the higher the interest rate. An annuity is an insurance contract, not a bank product or a security, and it’s not guaranteed by the FDIC, therefore an insurance company’s financial strength should be considered when purchasing an annuity.

Annuities can provide predetermined income payments over essentially any number of years the annuity owner chooses — 10 years, 20 years, or for as long as the owner lives. A person purchases an annuity at an amount they determine, and then decides the type and structure of annuity they want. While there are a number of types and many structures, the two primary choices are between one that provides an immediate income or one that pays out at the end of the term, respectively called immediate annuities and deferred annuities.

Those buying annuities often use it as another option for growing individual income, much like investments such as stocks, bonds or mutual funds. While not an investment vehicle because there isn’t the risk of loss, it’s often part of a person’s investment portfolio. Annuities are a place to put some money to realize growth at no risk while deferring tax payments during the term.

What’s the difference between the two annuities?

A deferred annuity grows, income tax deferred, at a guaranteed interest rate for certain period of time. That allows a person to grow their money on a tax-deferred basis and at a higher interest rate than is available in vehicles such as a bank CD. Unlike a CD, with an annuity, the owner only pays tax when the money is taken out. At the end of the term, annuities can have a higher balance than a CD because that money is not being taxed until the very end.

The immediate annuity offers the owner regular payments throughout the duration of the term — that could be a few years or as long as the owner lives. So, instead of letting the money accumulate interest, the insurance company pays the holder a predetermined amount over a predetermined period, guaranteed.

What should be known before purchasing an annuity?

Immediate annuities offer a set income for a defined period; that could be for 10 years or for as long as the person lives. For the latter, the insurance company will calculate payments on the person’s life expectancy.

The purchase of an income annuity is an irrevocable decision. That’s why it’s important to structure an immediate annuity properly with the help of a knowledgeable, qualified broker so the terms can be set up to give the owner the full amount they expected at the time of the purchase.

Choosing the payout option is an important aspect of purchasing an annuity. Whichever option the purchaser chooses determines how much they get in return with each payment. Those who choose a life-only option face the risk that if they die, they would not realize most of the benefits of that annuity income. However, there are options for payments to continue to a beneficiary. This is another reason to work with a qualified, knowledgeable insurance broker to discuss all the options, the pros and cons of each, and determine the best structure for the individual situation. Those who purchase a deferred annuity should know liquidity is limited.  The company may let you access a small portion of your money penalty free but any withdrawals above the penalty-free amount will be subject to surrender charges.

Craig Berson

President and CEO


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Brokers, connect with Craig to explore how annuities could benefit your clients.