2022 AFBA Financial Planning Guide

payment for a specified period of time such as 10, 15, or 20 years. This type of annuity may be useful when the objective is to bridge an income gap. For example, assume that Mary is widowed at age 52 and will receive no social security benefits until age 62. To bridge this income gap, Mary could invest the proceeds of her husband’s life insurance policy into a period certain immediate annuity which will provide her with an income stream until she is eligible for social security benefits. d. Joint and Survivor Annuity. In this option, you will be paid a monthly benefit for as long as you live. Upon your death, a predetermined percentage of the monthly payout will continue to be paid to a stated survivor (beneficiary) until that person dies. 14–3. ANNUITY PROS AND CONS PROs: a. Taxes. Funds deposited in an annuity grow tax-deferred which means it is not subject to income tax until you withdraw it — usually at retirement when you may be in a lower tax bracket. Some tax deferred retirement programs such as IRAs and 401(k)s limit the annual contribution amount; however there is no annual contribution limit for an annuity. This allows you to invest more for retirement. b. Annuities Qualify for Direct Rollovers. If you receive any lump sum distribution from a company pension or profit sharing plan, rather than having it transferred directly to another eligible plan, your employer is required to withhold 20% of the amount. You can avoid this withholding trap by having your money transferred directly into a qualified annuity. c. Annuities Avoid Probate. Annuities do not have to go through probate when you die. Since an annuity is a life insurance contract, all of its proceeds are distributed immediately to the beneficiary under the terms of the contract, completely bypassing probate. The value of the annuity generally is included in your estate for estate tax purposes, but not for probate. CONs: a. Lack of Liquidity. Annuities are designed to be a lon g- term investment. Consequently, if you think that you may need your funds for some other purpose, it may be wise to not purchase an annuity.

b. Surrender Charges. Most policies have surrender charges for early termination. Many surrender charges will start at a high preset rate and will decrease with each year until the charge eventually goes away. c. Annual Fees . Variable Annuities often have high annual fees. Investment management fees and various insurance charges can total as much as 2 to 3% per year. On the other hand, account maintenance charges for mutual funds generally run approximately 1.5% per year. d. Future Payments . Since annuities are sold by insurance companies, their ability to pay is determined by their financial strength. Consequently, it’s important to only buy annuities from companies that are financially strong. Credit rating agencies such as A.M. Best and Moody’s evaluate the financial health of insurance companies. Their ratings can be found online at www.ambest.com and www.moodys.com .

Selecting the Right Annuity

What are your financial goals and objectives?

You might consider this type of annuity.

Are you starting to save for re - tirement and want to save over a period of time?

Fixed Annuity, Flexible Premium

Do you prefer receiving a fixed rate of interest with a guaran - teed minimum interest rate?

Fixed Annuity, Flexible Premium

Do you have a lump sum of money to invest?

Fixed Annuity, Single Premium

Do you prefer the possibility of a greater return (coupled with a higher risk) to a fixed rate of return (lower risk)?

Variable Annuity

Do you want your investment to immediately begin paying monthly income payments to you? Do you have a lump sum of money to invest?

Immediate Annuity


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