Estate Planning Law
You can think of annuities as something between a retirement plan and life insurance: you invest some money now in return for getting paid back in the future, presumably when you might otherwise not have a stream of income. This system is designed to protect you from the risk of outliving your income.
More formally, an annuity is an agreement in which an insurance company promises to make payments to a recipient (called an annuitant), either immediately or at a determined point in the future. Because annuities laws differ from state to state, it is best to consult an estate planning attorney in your state to get the best advice for your particular situation.
You can purchase an annuity either with one large payment or installments over a period of time. Correspondingly, the insurance company would award your annuity as either one lump sum or as a series. The timing and manner of payment depend on the type of annuity and the terms of the annuity contract. Accordingly, an annuity can serve as an effective estate planning tool to provide for your wellbeing and the financial security of your loved ones.
By purchasing an annuity, an annuitant can ensure that they will receive payments into retirement, and often even for the remainder of their life or the life of their spouse or partner. If an annuitant passes away before they are due to receive payments, they can designate a beneficiary to receive their “death benefits.” Income taxes usually do not apply to annuities, since they grow until the money is withdrawn or until you begin collecting payments. Thus, combining annuities with other strategic estate planning tools can be an optimal way to provide financial predictability and assurance for yourself and your family.
Immediate annuities are guaranteed to provide you with lifetime payouts “immediately” (or within the first year) upon purchase of the annuity. However, you (the annuitant) not be able to withdraw a lump sum. Instead, you contribute a set amount of money in return for recurring payments for a guaranteed period or until your death.
These payments are guaranteed unless the insurance company uses a contingent annuity contract, which specifies certain terms for a triggering condition that must be met before the beneficiary will receive payments. Contingent annuities are commonly seen in the case of life insurance and pensions, which are contingent on someone either being alive or deceased. “Contingent annuity” should not be confused with the term “contingent annuitant.” A contingent annuitant is a secondary annuitant who receives payments only in the case of the primary annuitant’s death.
Deferred annuities, on the other hand, provide payments as a lump sum or on a set future (“deferred”) date. Upon your payment of premiums to the insurance company, your funds will be invested for growth, allowing you to maximize your future retirement income tax-free until you begin to withdraw money at a later point.
Generally, annuities fall into three categories:
- Fixed – Here, the annuity is guaranteed to net you a minimum rate of interest alongside a fixed set of installment payments.
- Variable – Variable annuities allow you to contribute funds using different investment strategies such as mutual funds. The annuity payout will “vary” based on investment return and management expenses.
- Indexed – Indexed annuities provide returns based on the stock market.
Many online resources classify other types of annuities in addition to the three general categories listed above—for example, the Internal Revenue Service (IRS) website.
Variable annuities are regulated by the Securities and Exchange Commission (SEC), and indexed and fixed annuities are overseen by each state insurance commission, such as is the case in Florida, Texas, North Carolina, California, and Missouri. If you are uncertain how your state regulates annuities or what form of annuity contract is best for your circumstances, consult with an estate planning attorney for more information.
In sum, annuities can be an effective way to plan your financial future. They can provide income security during retirement, but they can also be used in the estate planning context to sustain third-party beneficiaries, including loved ones. While annuities might not be the right choice for everyone, they are insurance products that may be appropriate for risk management, financial predictability, and age considerations.
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