The Advantages of Annuities

An annuity is a financial tool that provides an income stream as part of estate planning. It can help with retirement planning if you don’t think you will have enough retirement income from Social Security or other investments. There are several reasons that purchasing an annuity can be advantageous for estate planning purposes. Investors should understand all their investment options to make the best retirement-saving decisions.

Annuity law varies from state to state, and financial planning situations can get complicated quickly. For more information about the advantages of purchasing an annuity, talk to a local estate planning attorney for legal advice.

What Is an Annuity?

An annuity is a fixed sum of money paid to someone each year, generally after retirement. You can buy an annuity as an insurance product with a fixed or variable income stream paid out income as part of a retirement strategy. Like other types of insurance, the benefits of an annuity will increase the longer you live. Annuities are an investment option for people who want a guaranteed income after reaching retirement age. There are different types of annuities, including:

• Variable annuities
• Fixed annuities
• Immediate annuities
• Deferred annuities
• Indexed annuities

The way an annuity works is you purchase the annuity as an investment. After a set date, you begin to receive distributions. The stream of income you receive from an annuity pays out monthly, quarterly, every year, or in a lump-sum payment.

Annuities are typically an insurance company investment in the stock market. However, they generally carry less risk because they provide periodic income for the rest of your life. Annuities also provide a death benefit to your named beneficiary if you die before receiving payments from your annuity. This has a built-in advantage for surviving families.

What Are the Benefits of an Annuity?

If you simply invest your assets in the stock market or mutual funds, you risk losing your investment. This could result in you not having sufficient money to live on for the rest of your life. Although annuities usually are invested in the stock market, you are guaranteed a certain amount of income for the remainder of your life. The income rate is regular regardless of stock market fluctuations. 

In this respect, you will not lose a large chunk of your investments due to the stock market. You would retain a fixed amount of income in the form of your annuity payments for the rest of your life.

Annuities are an effective estate-planning tool. You must name a beneficiary or beneficiaries who will directly receive all or a portion of your annuity investment.

Annuities are also an attractive investment option in that they allow your investment to grow tax-deferred until you begin receiving periodic income payments. When you begin receiving payments from your annuity, you pay taxes at the lower capital gains rate, as opposed to the regular income tax rate.

What Are the Limitations of an Annuity?

It is important to keep in mind that annuities are most useful if your goal is to plan for your long-term future. Investing in an annuity for less than 10 years may not carry the same advantages. If you withdraw the value of your annuity investment prior to its payout period, you will pay taxes at the regular income tax rate.

Does an Annuity Pass Outside of Probate?

Probate is the process of handling someone’s estate after they die. By law, some assets can pass outside of probate. This makes it faster and easier to distribute assets by avoiding probate. Annuities are a type of non-probate asset, along with trusts, retirement accounts, and life insurance policies.

Like a life insurance policy, an individual retirement account (IRA), or a 401(k) plan, you simply name the person to receive the annuity proceeds upon your death. The beneficiary will receive the money without losing some of it to probate lawyers and estate taxes.

How Can an Estate Planning Lawyer Help With Annuity Contracts?

It is also important to keep in mind that there are other types of investments, such as 401(k) plans and IRAs. These other financial products may provide similar or even better tax advantages than annuities. You should consult a financial advisor or estate planning lawyer to determine whether purchasing an annuity would meet your needs and provide for your loved ones. Tax and estate planning can depend on where you live.