Why or Why Not Have an Annuity?
March 28, 2023 | Gabe Taylor
Annuities are a valuable tool that can shape a retirement plan and give security to those who can’t afford to heed the risk that other financial growth products have. Just like other insurance products, annuities come in many shapes and sizes. In this section, we will look at who might be a good candidate for an annuity, we will lay out the pros and cons of these annuities, and we will look at a couple different examples of what an annuity would look like under different circumstances
First, lets take a look at why somebody would want an annuity and why millions of people around the world take advantage of them. We will be exploring the MYGA (Multi Year Guaranteed Annuity) which is a traditional annuity that we offer at Twin City Underwriters.
Multi-Year Guaranteed Annuity
With a MYGA, the owner would put an initial lump sum of money into the policy, this lump sum would accrue compounded interest at a specified rate (about 5% right now) until the policy matures. The life of the policy is determined by the owner, the life could range from three years all the way up to ten years.
Read: What Is An Annuity?
These MYGAs are in no way correlated with the stock market, meaning that no matter what the stock market does over the span of the life of the annuity, the interest rate will stay fixed. This is a great way for somebody to diversify their portfolio and leverage their money against the market. This characteristic is also why this product may perfectly suit a retiree, in this economy it’s sometimes hard to find a financial vehicle that can guarantee positive returns, and as retirement funds have dwindled at an alarming rate over the past couple of years, this is a great way to keep the money safe from the market’s uncertainty.
Another one of the huge upsides of these MYGAs is that the interest accrued on the policy will be tax deferred which means that the government won’t take money out of the policy each year and tax the interest as ordinary income, all of the interest accrued will stay safe in the policy and then be taxed at the time it is taken out. This calls for higher growth rate and as a common trend, the farther out you are in retirement, the lower the tax bracket you are likely to be in.
Twin City Underwriters is also offering an annuity product that focuses on covering long-term care costs.
This product functions just as a MYGA would with a single lump sum payment and a fixed interest rate, but on top of that there is an option to add a rider or a “perk” to the annuity. This rider is specifically geared towards long-term care. With the rider in place, if the annuitant needs any form of long-term care during the life of the policy, the value of the contract will double or triple depending on underwriting guidelines. For example, say there was $50,000 in a LTC annuity and the day comes where the annuitant needs LTC, that value will either turn into $100,000 or $150,000. In terms of tax advantages, if that money is used towards LTC expenses, none of it can be taxed!
Now to get into the couple downsides of one of these annuities, which if assessed correctly, might not be a downside at all. The first one is that more or less your money is locked up within the lifetime of the annuity. The owner is able to take out 10% of the policy each year, but anything more than that will have a penalty attached to it. This penalty will vary depending on how long the policy has been in place, but the penalty is typically a percentage in the single digits. This is why one should only purchase an annuity with money they know they won’t need for the duration of the life of the policy.
Another downside to one of these annuities is that say the market performs very well in a given time frame, the annuity will stay at that specified fixed rate. MYGAs are a conservative product, which is why they are so popular with retirees who can’t afford to lose their retirement funds in a bad market year.
So, where does that leave us?
Who is a perfect candidate for an annuity? It really all comes down to the individual and their situation. For somebody who wants to guarantee to preserve money or diversify their portfolio, an annuity is a great option! For somebody who can’t set a lump sum of money aside or somebody who takes a very aggressive approach with their money, and can afford to have a bad year, maybe the annuity isn’t the best product for them.
In terms of the LTC annuity, if you don’t want the uncertainty of a traditional LTC policy with ever changing premiums and uncertainty of future costs, then a LTC annuity might be something to consider! With a LTC annuity, there are very few moving parts, you know what you will get from it and there is much less uncertainty. And in the case you never need LTC, the money will still have accrued interest over the life of the product, whereas with traditional LTC insurance, if you never need LTC, all of those premiums could be thrown out the window.
For more information please feel free to reach out to us! We would love to get into more detail with these products and show you the huge benefits that they can offer. Remember there is never a fee associated and no obligation to purchase. We look forward to hearing from you!
Are you ready to have a meaningful discussion about your financial needs? Call or email TCU today to set up a free, no-obligation appointment with one of our dedicated agents.
Call Twin City Underwriters to learn more: 651-488-0172 or 800-507-6778.
