When considering options for securing a stable retirement income, annuities can come into the conversation as a possible solution. But with so many types and details involved, it’s essential to understand what an annuity is, how it works, and whether it aligns with your financial goals. We will break down key questions you may have about annuities, ranging from the basics and various types available to how they’re taxed and their potential benefits and drawbacks. Whether you’re exploring ways to safeguard your financial future or looking for options to cover long-term care expenses, understanding annuities can help you make an informed decision.

Q: What is an annuity?

A: An annuity is a contract between the purchaser/owner and the issuing insurance company. Annuities can be purchased by making either a single payment or a series of payments over time.  Annuities are generally viewed as retirement vehicles because they offer tax-deferred growth and provide a reliable, guaranteed stream of income that cannot be outlived.

Q: What are the different types of annuities? 

A: There are three types of annuities: Fixed, Indexed, and Variable.

• Fixed Annuity – A fixed annuity is one in which the insurance company promises a guaranteed rate of return for a period of time set forth in the annuity contract.
• Indexed Annuity – An index annuity offers growth based on some market index, such as the S&P 500. Index annuities offer downside market protection, and the accumulation value is not affected by negative market performance.
• Variable Annuity – A variable annuity allows for growth based on mutual fund-type investments called sub-accounts. The rate of return is determined by the performance of these sub-accounts. Variable annuities generally offer a wide range of sub-accounts, allowing the annuity owner to choose sub-accounts that meet their risk tolerance and investment objectives. The accumulation value in a variable annuity will fluctuate with market performance.

Q: How are annuities taxed?

A: Distributions from annuities are taxed as ordinary income. When an annuity is funded with after-tax dollars, it is considered a non-qualified annuity. In a non-qualified annuity, only the gains above the original investment are taxed.  Distributions from a non-qualified annuity are taxed on a “Last In, First Out” basis. This means interest earned must be withdrawn first before the original investment. When an annuity is funded with pre-tax dollars, it is considered a qualified annuity. All distributions from a qualified annuity are fully taxable.  (Please consult your tax advisor for the tax treatment of distributions from an annuity).

Q: Can an annuity be helpful to the success of my financial plan?

A: Yes, an annuity could potentially be helpful, but ensure you discuss your insurance options with your advisor. Distributions from annuities can be used how one chooses. There are, however, hybrid annuities that offer traditional guaranteed growth while providing the added benefit of leveraged dollars for long-term care. Should you not be able to perform two of the six activities of daily living, or you are cognitively impaired, these annuities will provide a monthly long-term care benefit. The biggest advantage of these types of annuities is that the interest growth is not taxable if used for long-term care.

Q: Am I required to annuitize an annuity to receive income?

A: No, you are not required to annuitize an annuity to receive income. While annuitization is one option to receive a guaranteed lifetime income stream, many annuities offer income riders.  Choosing to exercise the income rider will provide guaranteed income for life. Additionally, you may simply make withdrawals from the accumulation value of your annuity.  Making periodic withdrawals from an annuity does not provide for guaranteed lifetime income and could lead to depleting the accumulation value of your annuity.

Q: Can annuities provide joint benefits for spouses?

A: Yes, annuities can be structured to provide a guaranteed lifetime income benefit to a couple as long as one person is alive.

Q: What are the disadvantages of an annuity?

A: Annuities offer potential benefits, but they are not right for everyone. There may be surrender charges, rider costs, investment fees, and other costs associated with the purchase of an annuity.  Annuities can be complex investment vehicles. Please reach out to your advisor to initiate a conversation about annuities and discuss whether they are appropriate for your situation.

Important Disclosure: Beacon Pointe Advisors, LLC and Beacon Pointe Insurance Services, LLC do not endorse any insurance company or product. Insurance and annuity products are not depositions, not guaranteed by a bank or its affiliates, not insured by the FDIC or other federal government agencies and may decrease in value. All guarantees and benefits of the insurance policy are subject to the claims-paying ability of the issuing insurance company. This commentary is intended for general information purposes only, and should not be construed as legal, tax, investment, financial, or other advice. It does not consider the specific investment objectives, tax and financial condition or needs of any specific person. Past performance is not a guarantee of future results. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Information that has been obtained from outside sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. Beacon Pointe Advisors, LLC is under common control with a related insurance agency, Beacon Pointe Insurance Services, LLC (“BPIS”). Certain employees are licensed insurance agents of BPIS and are compensated for the sale of insurance products. Clients will not pay both a management fee and commission for such products. 

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