Annuities are long-term insurance contracts that offer ongoing payments and may offer tax-deferred growth. People who buy annuities may be concerned about the potential for “outliving their assets” and running out of money. An annuity may offer lifetime payments.
What are the types of annuities?
Fixed-rate annuities have established interest rates and distribution amounts, so you know what you will receive. Fixed-rate products may provide stability, but you won't receive the full benefit of a high-performing investment.
Variable annuities allow the investor to select from investment options that often mirror specific mutual funds. The investor's payment from the annuity varies according to the contributions, performance, and the annuity fee and expense structure.
Indexed annuities reflect the performance of a stock index.
Who should consider annuities?
An annuity may be a sensible supplement to your investment portfolio, providing balance along with stocks, bonds, and mutual funds. In addition, for investors concerned that they may live longer than their assets, an annuity can provide a potentially stable source of income.
Annuities are generally considered reliable investments, although it’s important to note that they are not insured by the FDIC (Federal Deposit Insurance Corporation). The National Organization of Life and Health Insurance Guaranty Associations oversees individual state guaranty associations. Any insurer that sells annuities must belong to the state guaranty association for the states in which they operate. States have particular regulations that may protect policyholders if an insurer fails.
What if I want to change companies?
You might have concerns about the insurer from which you bought your annuity or that you believe a different company might offer a better term or more successful results. In any case, you can move the annuity, but you should be careful in proceeding. In most cases, the investor uses taxable income to buy an annuity. However, the earnings grow tax-deferred if the product is qualified. On the other hand, if you make a lump-sum withdrawal from your annuity, you will owe taxes and a tax penalty, just as if you made an early withdrawal from an IRA or 401(k) plan.
Performing a 1035 transfer.
If you need to change annuity companies, you can safely conduct the switch using a 1035 exchange. The designation refers to the Internal Revenue code section that allows and governs this action. Taxpayers can complete a 1035 transfer to move certain insurance products from one insurer to another.
Similar to the better-known 1031 exchange covering real estate assets, the annuity must be replaced with a "like-kind" policy to qualify for an exchange. Here is the basic process:
- Identify a replacement policy.
- Contact the existing and targeted insurer.
- Complete an application for the new policy and a 1035 transfer request form.
- Await the issuance of the new policy.
You must complete the entire process within 30 days, and the policyholder’s name must remain the same. Keep in mind that even though you may be able to avoid a tax penalty, it’s possible that the original insurer may charge an early termination fee. You may also face higher costs by paying an additional commission when you switch providers.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.
A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments or index.
Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.