Advanced Annuity Questions (Answered)

Annuity Associates strives to educate people on annuities. We’ll be the first to say that there’s always something new to learn, even for those that consider themselves experts in this arena. Here are some advanced questions about annuities, answered by our team.

Should I Buy An Annuity If I’m In Poor Health?

If you’re in poor health or expect to have a shorter lifespan due to health conditions, this purchase may not be right for you.

These contracts assume that the annuity purchaser is in good health. If you want guaranteed income, you can purchase a 5, 10, or 20-year fixed term policy. If you and your spouse want to purchase a joint annuity, you might want to consider a life annuity on the healthier spouse and a fixed term annuity for the one in poor health. Additionally, there are special products for people in poor health called substandard health annuities. These contracts pay out more money per period than typical policies.

Annuity Associates will connect you with a financial professional who can discuss your options with you. Get in touch with our team to learn more.

Can I Use 401(K) Distributions To Buy An Annuity?

While most 401(K) plans offer annuity options, they don’t do such a great job helping you make the right choice.

Purchasing an annuity with a 401(K) distribution allows you to invest your distribution tax-free in an instrument that can provide you with a guaranteed income. While this sounds great, there are a few complications. For example, since the passage of the SECURE Act in 2019, employers now have much more flexibility in including annuity options as part of their 401(K) plans. While combining annuities and 401(K) investments can be a great retirement strategy, the options in your employer’s plan might not reflect the full range of annuities on the market.

By shopping the commercial market with your Annuity Associates agent, you can be confident that you’re seeing the best rates of return and the lowest fees.

What Tax Implications Are Involved When Transferring An Annuity?

Yes, you can switch an annuity from one company to another as long as it’s still in the accumulation phase.

There are a few ways the IRS allows you to do this tax-free. However, most companies have a surrender period, generally about 5-10 years. During this period, you must pay a surrender charge in order to withdraw your money. So, even if you don’t have to pay taxes, switching companies can be costly.

When you move your annuity, you generally restart the clock on the surrender period with the new company, as well. Switching companies should only be done after you’ve read your contract carefully, preferably with a financial professional.

How Can I Use Annuity Income Riders?

Income riders are a great way to ensure a steady income stream. There are a few things you should be aware of, though.

Riders are typically separate calculations within your annuity policy. Your annuity statement will list the following:

  • Accumulation or investment value
  • Surrender value (the accumulation value minus any surrender fees)
  • Rider value

Because the rider value is a separate calculation, you can’t access it the way you might be able to with a CD. For instance, you might have an income rider that grows your money at an annually compounded 5%. Your income payments are based on that compounded amount after you choose to annuitize. However, you don’t have access to the full compounded amount if you want to withdraw early.

Income riders typically come with fees that can eat into your payments. An Annuity Associates professional can help you decide if income riders are right for you and make sure you get the most benefit for the lowest fees.

Should I Consider A Cost Of Living Adjustment (COLA) Rider?

If you’re already receiving Social Security payments, you are likely familiar with COLA increases at the end of most years. A COLA rider in your annuity works much the same way to make sure your payments keep up with inflation.

Some COLA riders are tied to the Consumer Price Index, or CPI. The CPI is a government measure of inflation that sets the COLA for Social Security. While the CPI is a good general measure, it can sometimes undercount health care and prescription drug costs. These costs are often a large part of the budget for many retirees.

Other COLA riders increase payments by a set percentage each year. While this ensures you get more money every year, the payments start off rather low. It takes quite awhile for the payments to increase to the level they would have been at had you not had the COLA rider. If you have expensive plans early in your retirement, like a big trip or home improvements, this type of rider might not be right for you.

How Do Annuities Work After Death?

If you have a death-benefit provision in your annuity, it will pass to your named beneficiary. They can receive the benefits of the annuity as a lump sum, over five years, or over their lifetime. No matter how they receive the payout, it will be taxed as regular income. The tax burden on a lump sum payment is generally the greatest, since the income will likely push the beneficiary into a higher tax bracket.

By naming a beneficiary in your annuity contract, you protect them from having to go through the lengthy probate process. If your spouse inherits your annuity, they can assume ownership and have the same rights and obligations that you had when you owned the contract. Any annuity benefits that pass to a beneficiary that isn’t your spouse are considered part of your estate for estate tax purposes.

Get In Touch With Annuity Associates To Learn More

Annuities are a simple concept that gets complex when you include tax implications and the customization options. Even if you’ve had one for a while, you still may have questions.

Annuity Associates believes in educating our clients. Still have questions? Contact us for a free, no-obligation consultation.

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