Contact us for assistance in exploring if annuities are suitable for your situation. They can be used for retirement planing, education funding, and funding expenses for long-term care.
An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.
Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates. If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.
There are generally three types of annuities — fixed, indexed, and variable. In a fixed annuity, the insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.
In an indexed annuity, the insurance company credits you with a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index. Indexed annuity contracts also provide that the contract value will be no less than a specified minimum, regardless of index performance.
In a variable annuity, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you eventually receive, will vary depending on the performance of the investment options you have selected.
Variable annuities are securities regulated by the SEC. An indexed annuity may or may not be a security; however, most indexed annuities are not registered with the SEC. Fixed annuities are not securities and are not regulated by the SEC. You can learn more about variable annuities by reading Variable Annuities: What You Should Know.
Using annuities to pay for long-term care expenses
You may choose to enter into an annuity contract with an insurance company to help pay for long-term care services. In exchange for a single payment or a series of payments, the insurance company will send you an annuity, which is a series of regular payments over a specified and defined period of time. There are two basic types of annuities, immediate and deferred.
Immediate annuity
If you have an immediate long-term care annuity, the insurance company will send you a specified monthly income in return for a single premium payment. This option is available regardless of your current health status, so if you do not qualify for long-term care insurance because of age or poor health or if you are already receiving long-term care, you can still purchase an annuity.
The insurance company converts your single premium payment into a guaranteed monthly income stream for a specified period of time or for the rest of your life. How much you receive in income each month depends on the amount of your initial premium, your age, and gender. Since women tend to live longer than men, women generally receive a smaller monthly payment over a longer period of time than do men of the same age.
Things to think about:
- The annuity amount you receive may not be enough to pay for your long-term care expenses.
- Inflation may reduce the value of the monthly income you receive from the annuity.
- The effect that annuities can have on your taxes is complicated. Consult your tax professional before purchasing one.
Deferred long-term care annuity
Deferred long-term care annuities are available to people up to age 85. Similar to other annuities, in exchange for a single premium payment, you receive a stream of monthly income for a specified period of time. The annuity creates two funds: one for long-term care expenses and another separate fund that you can use however you desire.
You can access the long-term care fund immediately, but you must wait until a specified day in the future to access the separate cash portion. The rules of the annuity define how much you can access on a monthly basis from the long-term care fund and how much you can access on an annual basis from the cash fund.
To qualify for a deferred long-term care annuity, you must satisfy some health criteria.
Things to think about:
- If you do not use the long-term care fund, you can pass it on to your heirs.
- The annuity may not be enough to pay for your long-term care expenses.
- Inflation may reduce the value of the monthly income you receive from the annuity.
- The long-term care portion of the annuity does not satisfy the requirements for a tax-qualified long-term care policy, so the government may tax the money from your long-term care expense fund.
- The effect that annuities can have on your taxes is complicated. Consult your tax professional before purchasing one.