Annuities and Long-Term Care

With a constantly evolving economy and many changes in life, it can be difficult to predict what’s in store for the future. That’s why it’s important you are financially prepared to face retirement income challenges and demands with confidence by planning for the unexpected.

With life expectancy on the rise, the need to save and plan for your retirement income is becoming more important. Don’t assume you’re going to work forever. Take action now to create a sound retirement income strategy. Don’t let the unknown keep you from taking control of your retirement.

Annuities can play an important role in retirement income, but it’s important to understand your options before making any decisions—particularly around defined benefit pensions, health care costs and Social Security.

The retirement landscape has likely drastically changed since you started planning. To decide if annuities should be part of your retirement income strategy, seek the guidance of an insurance professional.

Annuities are financial tools commonly found in a variety of retirement income planning strategies. Simply, an annuity is a contract between you and the insurance company. Annuities are usually purchased by either providing a single, up-front payment or multiple payments over time. Similarly, when you receive money from an annuity in the form of a payout, it can either be paid in one lump sum or in multiple payments over time.

Annuities are often purchased as an income distribution vehicle for retirement, which means they can be one of the top sources of income during retirement years. Helping to add to their popularity, annuities grow tax-deferred over time, meaning you pay no tax on your initial premium and/or the growth it has accumulated, until you begin receiving payouts. Additionally, some annuities include provisions to pass the remaining value to your beneficiaries, so if you pass away before you start receiving payouts, your beneficiary would receive a payment specified by your annuity contract.

There are two types of annuities: fixed and variable. In this guide, we will be discussing the differences, distinctions and benefits of fixed annuities, including traditional fixed and fixed indexed annuities.

Traditional fixed annuities provide the purchaser, by contract, a minimum interest rate to enable growth over time.

Both fixed and fixed indexed annuities are regulated by your state’s insurance commissioner and are sold by licensed agents.

Once you retire and begin drawing money from your annuity, known as the distribution phase of your life, you have options. While often at an additional cost, you can opt for additional benefits including receiving money from your contract in a lump sum, over a period of time or for the remainder of your life. The unique design of these financial vehicles annuities makes this possible.

Annuities offer many different benefits and attractive features. However, that doesn’t necessarily mean one is right for you. Everyone’s retirement income situation is unique. Before deciding to purchase an annuity, examine of your retirement income goals, needs and concerns. Be absolutely certain an annuity is right for your situation before you make a commitment. Think about what your income needs will be in retirement and what your budget may look like.

Also, consider your risk tolerance and how sensitive you are to market fluctuations. Can you handle changes in your income year to year? Or, would you prefer a steady and more predictable stream, even if your overall return may be lower? These are important points to consider before committing to any financial product.

Even if you don’t need long-term care, it is likely you will need some form of health care in retirement. Again, if you are using an annuity as a retirement income tool, you should consider if the annuity could help provide income you may use to pay for medical treatments.

An annuity may be an effective tool for providing a consistent, predictable income that could give you more financial flexibility to pay for things like medical copays, deductibles and prescription drug costs.

Of course, there are a variety of retirement income strategies that could help with these same expenses. Consider how the income from an annuity could help pay for health care, and compare the annuity to other options to see what best fits your needs.

Q: Are annuities guaranteed?

A: Annuities are backed up by the full faith and credit of the particular life insurance company issuing the annuity. They are not guaranteed by the FDIC, like CDs and bank accounts. Many life insurance companies that offer annuities are very highly rated. Before you purchase an annuity, be sure to look at the company’s financial strength.

Q: What is annuitization and when do I have to annuitize my annuity contract?

A: Annuitization is the act of turning your deferred annuity value into a stream of payments.

Q: How are taxes paid on annuities?

A: Much like IRAs and 401(k) plans, annuities are tax-deferred, meaning you don’t pay any taxes on the annuity’s growth until you begin withdrawing interest. If you withdraw prior to age 59½, you may have to pay a 10-percent IRS penalty. Also, if you withdraw money during your surrender period, you may incur surrender charges.

Q: What are surrender charges?

A: If you withdrawal or surrender some or all of the contract during the surrender period, you may have to pay the surrender charges per the contract. Surrender charges are in place for a specified period of time. These charges are often scaled and reduce over time until there are no charges in place. Many annuity contracts have a free withdrawal amount you can withdraw each year without paying a surrender charge.

Q: Can I put my IRA in an annuity?

A: Yes, you can. In fact, many annuities are purchased with IRA funds. However, you should know you won’t get any additional tax benefit from the annuity. You are already getting tax-deferral from the IRA, and that same deferral applies to the annuity.

Q: Can my interest rate change?

A: That all depends on the terms of your specific annuity contract. In some fixed annuities, the initial interest rate is locked in for the length of the contract. In others, it can change every year or every few years. In fixed indexed annuities, the interest rate can change based on the performance of an external index.