Today I have put on my insurance agent hat and will talk about what I believe to be a good place to invest not only your retirement but spare cash. You can even be retired and get one heck of a deal with this product.
I am talking about the good ole annuity that has had its reputation tarnished but is on its way back to being the star it should be. Because annuities come in a variety of flavors, ie, fixed, single premium immediate income, variable, etc, I’ll stick only to the virtues of fixed and single premium annuities.
An annuity is nothing more than a contract between you, the contract holder, and an insurance company, the contract issuer. You agree to give them money, whether in a lump sum or over a period of years and they agree to pay you a certain sum at a later date.
That isn’t very complicated, right? Truth is, it can get more complicated especially if you have a larger than normal estate. This post won’t deal with complications.
The IRS And Annuities
Most people don’t know insurance companies are regulated not only by state and federal laws but also by IRS code sections. These code sections are what allow you and I to receive annuity payments at generally favorable rates. For the purist, we get favorable treatment through a code section that created something called an exclusion ratio.
I will not cover that either. All I’ll say is, trust me, it works to your advantage. This one feature alone makes annuities a great consideration.
Annuities aren’t for everyone in every situation but an IRA is a good place to have an annuity. When my son left his job, we rolled over his retirement account into an annuity. We did that so his portfolio wouldn’t suffer the vagaries of the stock market and because he knew by how much it would grow over a specified period.
My son is not exactly a wild eyed risk taker when it comes to his money. He wants a guarantee as to principal and interest and a reasonable expectation that he will have a cash stash when he retires. An annuity was right for him because the company guaranteed performance. The company didn’t guarantee it would be around when he retires but that is of minor significance.
Life Expectancy of Insurance Companies
As it turns out, here in the United States, insurance companies have had great success staying in business. Even when one fails, the policy holders are protected because each state has a fund that takes over the policies and parcels them out to the solvent insurance companies in the state. I won’t go into the particular details because each state has their unique procedure. Suffice it to say, when your contract is transferred, the new company will honor the terms of your contract as if they had been the original issuer.
That is why I made the statement my son’s company being around when he retires is of minor significance. The state agencies take their job seriously and step in immediately to protect their citizens. At least according to what I’ve seen to date in this business.
More Of The Story
Annuities, like other investment products, carry costs. I won’t get too specific with this either because if you are considering an annuity, your agent is under obligation to explain all of the costs. In other words, the days of hidden costs and expenses are over. Full disclosure – just like in real estate – is mandatory. Not only will the agent detail the costs but your policy will spell them out as well.
If you are a math whiz bang, you will be able to compute that even a .05% charge will have an impact over a 20 year contract. I won’t go into this either because of the various charge amounts that come with each company’s annuities. Just be cognizant that a charge exists.
Be aware too that most annuity contracts have stated periods. They run anywhere from one year to ten years, in most cases. Selecting the time period best for you shouldn’t really be that difficult especially if you know how long you want your money to stay at tax deferred interest.
Tax deferred interest, as you might guess, has advantages over taxable interest. Per the law, annuities pay tax deferred interest. That is sweet even to the most casual of investors.
To close this post, I’ll use the caveat to be sure and do some research on the issuing company. If the company doesn’t at least have an A.M. Best rating of A, you may want to look at another company. It isn’t too difficult to research insurance companies. Several big search engines have a finance section to help you get started.