8 Reasons to Buy an Annuity

2. Guaranteed Lifetime Income

With fewer employers offering a defined benefit pension these days, an annuity can be a source of guaranteed lifetime income for your client in addition to Social Security. This can help balance riskier assets that clients may have in taxable investment accounts or in retirement accounts.

The use of an annuity that offers the type of payment option that best fits your client’s situation can be looked at as a way to diversify their retirement income stream and reduce their overall portfolio risk.

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3. Locking in Higher Interest Rates

In many cases, fixed annuities may offer higher rates than other types of interest-bearing investments such as bond funds or CDs. During periods such as the one we are going through currently, annuities can offer a way to lock in higher interest rates for your clients.

Case in point; Stephanie McCullough, founder and CEO of Sofia Financial, had a client who needed to generate some extra income to cover her costs to live in a retirement community. McCullough found a single premium immediate annuity (SPIA) that paid a considerably higher interest rate than the bond fund the client had been invested in, allowing the client to easily cover the monthly costs solely from the payments generated by the SPIA.

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4. Tax-Deferred Funds Beyond 401(k)s and IRAs

Clients who are maxing out contributions to their 401(k) and IRAs may want to consider adding a nonqualified annuity. The additional contributions will allow the premiums to grow on a tax-deferred basis until the account is annuitized or withdrawals are made.

While the premium payments are not made on a pretax basis, the benefit of tax-deferred growth can still be a powerful tool in accumulating a retirement benefit from the annuity.

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5. Protection Against Market Downturns

Fixed annuities offer a guaranteed rate of return that will not be affected by a downturn in the markets. The guaranteed rate will vary depending on the terms of the contract and the insurance company. Other types of annuities may have a guaranteed minimum return or a floor on the contract’s downside during the accumulation period. The latter is common with fixed indexed annuities.

Michael Mezheritskiy, president of Milestone Asset Management Group, is a big fan of the single premium deferred annuity (SPDA). “It has a very appropriate place in many portfolios for individuals who are very concerned with market fluctuations,” he explains. “SPDAs can be funded with qualified or nonqualified money and work very similar to a CD, though there is no FDIC insurance. You place a lump sum for a certain duration — usually three or five years — and you have a fixed rate of return.”

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6. A Tax-Free Stream of Income

One strategy to consider is purchasing an annuity inside of a Roth IRA. Assuming the five-year rule and other requirements have been satisfied, the annuity can generate tax-free income for your client. The rules of the Roth IRA account govern this type of nonqualified annuity.

While premiums can be paid from annual contributions, if they have a substantial balance in their Roth IRA, it may make sense for them to make one or more lump-sum premium payments. This may have come from Roth conversions done over the years and/or the rollover of a designated Roth account from a 401(k) or other type of employer retirement plan to a Roth IRA.

Doing a lump-sum premium payment can allow your client to fine-tune the annuity to their retirement income and tax planning needs. For example, they could purchase an immediate annuity to fill a portion of their retirement income stream, or they could purchase a deferred annuity that commences generating income at a future date when the tax-free income may be needed.

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7. Ability to Customize

Many annuities offer riders and other contract provisions that can allow your clients to tailor the contract to their situation and needs. Riders often fall into two main categories. Guaranteed minimum death benefit riders allow clients to tailor the death benefit on the contract if they were to die during the accumulation phase of the contract. Living benefit riders might include riders to protect against the impact of inflation or a guaranteed minimum accumulation benefit that protects against downside risk in the markets.

Riders will vary among different contracts and insurers. The cost of a rider will generally impact the ultimate benefit levels your clients receive.

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8. Long-Term Care Protection

For clients seeking protection against the cost of long-term care, a contract offering a long-term care rider can make sense. These riders can be included with a deferred annuity. Depending on the contract, your client can receive monthly payments or take a lump sum to cover long-term care expenses.

An annuity with a long-term care rider can be a good alternative for clients who want protection against potential long-term care expenses that could affect their retirement but who don’t want to purchase a separate long-term care insurance policy.

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