Annuities: Financial Wellness
Annuities come in many styles and are contracts between an annuity holder and the insurance company. Contracts carry different provisions, costs, payouts, and tax rules. While annuities can be personalized to fit a consumer's needs, it is important to remember there are vast arrays of possibilities that can seem overwhelming to potential annuitants. There is a wide menu of annuity contracts and products that can seem daunting to consumer's who are considering them. Particular annuities may have a mixture of provisions, signifying they fit into different types and classifications. Every provision comes with different costs and benefits. Below are some key details of how annuities may impact a consumer's financial wellness.
What Are The Different Types of Annuities?
- Fixed annuities can guarantee that consumer's earn interest and offers a guaranteed payout. The payout amount remains constant for the term of the annuity contract.
- Variable annuities allows consumers their choice of risk levels along with different investment options. Some consumers may receive a sizable payout or risk losing their money completely. This depends on the options they choose from. Payouts are based on the investment’s performance.
- Indexed annuities earn a return attached to a certain market index (commonly the S&P 500). Should a consumer's annuity perform well, a consumer's monthly payout during retirement may be higher. Annuity payouts are based on the performance of a specified equity-based index.
- Immediate annuities will begin payouts within a year after purchase.
- Deferred annuities will begin payouts at a later point as agreed to within the consumer's contract.
- Immediate and deferred annuities are both tax-deferred, and consumer's will not have to pay the IRS until they receive their payout.
The Pros of Annuities Impact Financial Wellness
- Annuities do not affect your credit score, but they can impact a lender's decision of your credit worthiness when applying for a loan. Annuities do not have to be listed as assets for future loans. For example, mortgage lenders look both at a consumer's credit score and debt-to-income ratio.
- Annuities do qualify as income towards debt-to-income ratio if payments are scheduled for at minimum the next 36 months.
- A life annuity is an income stream for life, even if the initial principal and earnings are exhausted. Consumer's can also purchase "joint annuities" with their spouse. However, the longer the person is expected to live, the lower the individual payments are likely to be.
- Consumer's who have culminated contributions to their 401(k) or IRA, an annuity is another option to use as retirement income.
- With no annual contribution limits, this sets annuities apart from a 401(k) or an IRA.
- While annuities provide a guaranteed return they don’t offer growth potential that other investments may, such as investing in stocks.
The Cons of Annuities Impact Financial Wellness
- Consumer's find that once you invest in an annuity, it can be difficult to get it back because of the terms set up in their payout.
- If a consumer is in a financial emergency, like unexpected medical costs or job loss, they may not be able to gain access to their money, or it might be too costly to do so.
- Annuities may have exceedingly high fees, up to 3% or more per year.
- According to Credit Karma, Vanguard does not charge annual service fees for traditional IRA's if consumer's have at least $10,000 in their account compared to $20 to an account that has less than $10,000.
- Annuity contracts may also charge fees for withdrawing your money early and adding on additional policies, or administrative fees.
- Withdrawing money from an annuity will cause severe tax penalties, which includes an inversion of the exclusion ratio process. The IRS considers this withdrawal as earnings in a "last-in/first-out" formula,
- Consumer's pay full taxes on money withdrawn until the annuity is left with the initial investment. The initial investment can be withdrawn tax-free.
- If a consumer doesn't fully understand every detail of their annuity, it’s possible that it can hurt a consumer's financial situation more than helping.
- Consumer's annuities are only as good as the insurance company's financial health. They are placing a bet that the firm won’t go under and will remain in excellent financial health. Financial institutions like Bear Sterns and Lehman Brothers show even the most successful institutions can capitulate.
- Annuities aren’t insured by the FDIC or NCUA, but are covered up to a certain amount as laid out by individual states.
To find the information above, our research team used data from fact based research sites and articles from reputable online business, banking and financial journals, reports and studies.