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Answering Some Common Advanced Questions About Annuities

During the last couple of weeks, Annuity Alliance has talked a lot about understanding the values of annuities. We’ve discussed annuities for beginners and understanding how annuities work as a part of your retirement strategy that could provide guaranteed lifetime income.

Last week, Annuity Alliance shared how inflation has impacted the accumulation power of safer retirement products, like bank CDs, and how most annuities have a better accumulation rate and are not as affected by sudden fluctuations in the market.

This week’s blog is focusing on the advanced level of annuities and providing answers to common questions for people with multiple annuities or knowledge of the advantages of these product.

  • How does my health impact the decision to buy an annuity? While insurance companies may have different longevity experience within their pool of annuitants, they all make assumptions that the individuals electing to purchase an annuity are in good health. Therefore, if you’re in poor health or believe that you have a shorter life expectancy for genetic reasons, a life annuity may be the wrong purchase for you. If you want the peace of mind coming from guaranteed retirement income then you can select a fixed period annuity for 5, 10, or 20 years. If you and your spouse are considering a joint and survivor annuity and one of you is in poor health, you may want to consider combining a life annuity on the healthy spouse and a certain (fixed period) annuity on the one in poor health. Annuity Alliance can connect you with a financial professional to discuss options.
  • Can I use 401(k) distributions to purchase an annuity? Most 401(k) plans offer a series of annuity options but little help in assisting you to make the right decision. They do require that if you elect an annuity option you elect out of a joint and survivor annuity. Under this annuity the annuity payments will continue to your spouse; either at the same amount or another amount, you select. When considering an annuity option offered through your employer you should also shop the commercial annuity market. There may be better rates and different options to choose from.
  • How do you calculate annuity income riders and how do they work? Most income riders and death benefit riders offer a guaranteed annual growth amount that can be used only for a specific need. For example, an income rider might offer a contractual growth amount of 6% compounded annually for as long as you defer or for a specific period of time. That 6% compound growth amount can only be used for income and the high percentage stops accumulating as soon as you turn on the lifetime income stream. You can’t transfer the amount or peel off the 6% compound interest like you could with a CD, but you can use that amount for income. Riders are typically separate calculations within the annuity contract used to determine payment levels. For example, if an income rider is attached to a deferred annuity, your policy statement will show the accumulation (investment) value, surrender value, and the rider value. All three calculations are different. There is generally a cost for annuity policy riders.
  • Can I transfer an annuity from one company to another without having to pay taxes? Yes, if the annuity is still in the accumulation phase. The IRS allows a few different ways for you to transfer your money from one annuity to another without paying taxes. Remember, that although the IRS allows tax-free transfers, your current company may charge surrender fees. You should always check your contract before transferring from one annuity to another.

Do you still have some questions about annuities? You can learn more in Annuity Alliance’s Resource Center, which has answers to commonly asked questions. You also can contact Annuity Alliance to get connected with a financial professional in your local area.