Annuity

How Fixed Index Annuities Can Help with Healthcare Costs

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How can a fixed index annuity help you with health costs, specifically certain long-term care expenses? Nowadays, many fixed index annuity contracts come with a provision called a wellness benefit.

In some situations where you need certain kinds of long-term care, the income from your annuity can be “enhanced” for a certain time period. Your annuity income can increase, often double, in order to help you pay for long-term care and its high costs.

This enhanced income generally lasts for a certain period, such as up to 60 months (or five years). The benefit can vary from indexed annuity contract to contract, so your financial professional can go over the details, pros, and cons of any contracts you may be considering.

How Likely Is It that Someone Needs Long-Term Care?

Statistics show that over 50% of those aged 65 or over will need some form of long-term care at some point in retirement. Couples in this age group have over a 50% chance of one of them needing this type of care at some point.

The costs of long-term care can be staggering in many cases. A year of home healthcare can easily cost anywhere from $50,000 to $55,000 per year.

Yearly residence in an assisted living facility costs around the same. Then a semi-private room in a nursing care facility can cost as much as $90,000 to $100,000 per year, depending on where you are in the country.

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Strategies for Laddering Annuities

Annuity laddering is a strategy in which someone buys or staggers several annuity contracts over some years. The goal is to maximize the benefits that you receive from the annuities, like guaranteed income streams, while managing risks such as interest rate risk.

Strategies for laddering annuities can give you more flexibility in your retirement plan. You can crack down on potential downsides, such as locking yourself into a reduced annuity payout while interest rates are low. That can be a helpful guard against inflation.

When you buy multiple annuities and then wait for some years to turn some of those contracts on, that gives them time for their contractual benefits to grow. You can have more higher lifetime income, or higher interest earnings for your money, as a result of this drawn-out strategy.

Depending on your situation, you may want to tap more than one annuity as part of a laddering strategy in order to maximize your benefits over time. Here are a few different laddering strategies that you can use with annuities to achieve this goal.

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Is a Survivor Annuity Death Benefit Taxable?

You may have heard of annuities and how they are the only thing besides Social Security that can pay you guaranteed lifetime income. But what happens to an annuity when someone passes away? The tax rules surrounding survivor or inherited annuities are already complex, but the SECURE Act, a federal law passed in 2019, has made them even more complicated.

The proceeds in a survivor annuity are generally taxable when the heirs receive them. If the recipient isn’t a spouse of the original annuity owner who passed, that recipient will pay taxes on the money they receive from the annuity.

If the surviving recipient is a spouse, then there are some steps that they can take to defer the taxes on the annuity proceeds. How much of the proceeds are taxable will depend on what type of account the annuity was housed in.

Most annuities are bought with pre-tax qualified money, meaning the premiums often come from a traditional IRA, a 401(k) plan, or another qualified plan. Since most annuities are bought with this pre-tax money, we will talk about how the SECURE Act can affect an heir’s tax burden now.

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Are Annuities Bad? Why They Can Actually Be a Good Solution for Many People

Despite the negative headlines and money columns painting them as otherwise, annuities are neither good nor bad. They are simply an instrument that works well in some situations and not quite as well in others.

For instance, an annuity is the only thing besides Social Security that can pay you a truly guaranteed income stream for life. That is a feature that you won’t find anywhere else. Period. You can also get other benefits such as tax-advantaged growth and financial protection from market risk, among other things, from different annuities.

Yet, you wouldn’t be able to tell that from the way that many folks, including financial professionals, react when annuities are brought up in retirement planning. And what do these critics say?

Such options “only” serve as a way for financial advisors or agents to make a commission, nothing more. They don’t quite stack up to other investments, according to the naysayers.

The issue with that sort of talk is it focuses on just the negatives. For starters, annuities aren’t an investment but a risk-managing tool.

They provide a strong defense against the risk of running out of money in retirement, which tops the list of financial concerns for many retirees and those nearing retirement.

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How Does an Indexed Annuity Differ from a Variable Annuity?

In past decades, more people have been buying annuities. A big part of this is due to the unique features that annuities offer, such as tax-advantaged growth and contractual guarantees such as lifetime income.

Of course, many kinds of annuities are available now. Knowing what annuity is right for your situation (if indeed a good fit) can be a challenge in some cases.

If you are looking for growth, then you might look at fixed index annuities or variable annuities, as they both offer more growth potential than traditional fixed-type annuities.

But to make a confident and well-informed decision here, it helps to know how these types of annuities are alike and how they differ.

At their core, both are contracts with a life insurance company for a certain period. Where their differences lie is how their money grows, their exposure to market risk, and the fees that they carry, among other things.

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What Is a Qualified Longevity Annuity Contract (QLAC)?

If you have spent some time exploring your options for retirement planning, you might have heard of a qualified longevity annuity contract, or QLAC for short. But what is a QLAC? What are some reasons that folks might consider this option for their situations?

As everyone knows, people tend to have many financial concerns nowadays. Having enough retirement income is a top concern among those who have stepped back from a full-time career. Among other things, low interest rates have made it harder to generate predictable income for even just run-of-the-mill living expenses in retirement.

With low rates hitting fixed-interest options such as CDs, Treasury securities, and bonds, the challenge is figuring out how to adequately supplement other sources of predictable income, such as Social Security or a pension. No wonder, then, that surveys have found that many retirees are afraid that they might run out of money in their later years.

Since they have a monopoly on paying reliable lifetime income, annuities are one vehicle that can help fill this gap. In fact, besides Social Security, annuities are the only thing on the planet capable of paying you a guaranteed income for life.

Challenges Still Linger

But even the income from an annuity may not be enough to cover a retiree’s expenses when they get into their final years, especially if they need services such as long-term care or home healthcare.

Conversely, many retirees won’t need to start taking money from their IRAs or workplace retirement plans when they turn 72 (the new age at which required minimum distributions must start). RMDs can create a tax headache for those with considerable retirement assets, and they may be an excess source of income in some cases.

Enter again a possible solution with QLACs, which can help with providing income in later years or providing some tax relief for a while regarding required minimum distributions.

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Are Annuities a Good Investment for Retirees?

Could annuities be a good investment for retirement? If you could have more peace of mind or your plan could be stronger from having contractual guarantees in it, such as guaranteed income for life, then it’s good to consider an annuity.

What about saving for retirement? If you are taking advantage of contributions to retirement accounts, then annuities can provide another tax-advantaged vehicle for you to build up even more retirement savings. These are just a few ways that an annuity might help you in your financial goals.

One Important Clarification

All of that being said, let’s go back to the original question: “Are annuities a good investment for retirees?” To delve fully into that, it’s important to be clear about what annuities are.

By definition, an annuity is a contract with an insurance company. In exchange for someone putting money into the annuity contract, the insurance carrier promises to uphold contractual guarantees over a certain time. This might be a contractual guarantee to pay you a lifetime income stream, for example.

Because of this use as a contract, many annuities aren’t technically an investment. Fixed-type annuities such as fixed annuities, multi-year guarantee annuities, and fixed index annuities are really fixed insurance contracts. In this regard, they are more of a risk-managing tool.

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How Long is the Accumulation Period for Immediate Annuities?

How Long is the Accumulation Period for Immediate Annuities?

The short answer? Immediate annuities actually don’t come with an accumulation period. Once you have paid premium into the contract – in most cases a one-time lump – the insurance carrier will start income payments nearly right away. Your income payouts may start anywhere from 1-12 months after the premium payment date.

When this starting date is depends on your contract and frequency of payments. You may receive income on a monthly, quarterly, or even annual basis. Many contract holders opt for a monthly payment schedule.   

The insurance carrier puts the entire sum of your premium into a pool of other premiums it has been paid. Then it allocates these premiums into conservative, low-risk investments. In return, the carrier pledges to make payments to you – or someone you specify – for a specified period of time, which can be for the rest of your life. The income you receive includes a fixed sum and interest paid on a continual basis.  

Therefore, immediate annuities don’t have an accumulation period – there is little time between when you pay premium and start receiving income. Many immediate annuity contracts start income payments just a month after the day you bought your annuity.

Where accumulation periods do apply is with deferred annuities. In these contracts, your money will be left alone for a number of years before you start taking income. Let’s get into more details below. Read More

Annuity Payout Options — What Does Period Certain Mean and How Can It Help You?

When it comes to annuities, have you ever heard of “period certain” payouts or other confusing terms? Many people use annuities for guaranteed income streams. It’s helpful to know what these terms might mean if you are thinking about an annuity for your retirement.

One of the great things about annuity contracts is how they can be structured to fit different situations. Do you want guaranteed monthly income for the rest of your life? The insurance company will pay you like clockwork, even if all of the money in your contract runs out and it’s still paying you decades later.

Or what if you want the guaranteed income to last for only a certain period? Then you have some flexibility in how long you choose to receive those payments. With help from your financial professional, you can explore different annuity payout options and see what makes sense for your needs.

Of course, some people worry about not being able to enjoy these guaranteed annuity payouts for as long as they might wish. What if something major happened and they passed away sooner in retirement than expected? They wouldn’t have a full return of the money that they had paid into the contract.

The good news is someone can choose payout options that continue payments to their loved ones should they pass away in this manner.

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Principal Protection — Are You Needing It Now?

Principal Protection -- Are You Needing It Now?

Are you at or near the point of needing principal protection? Not everyone has the same psychology of investing, but many people start tapping the brakes on their tolerance for risk as they near retirement. While financial markets had some history-making moments in the 2000s, they saw never-before-swings in 2020.

Because of the economic and financial disruptions from the novel coronavirus, and resulting investor fears, the stock market had wild swings happen just in a matter of days. Beforehand, it had taken weeks or months to see such market volatility.

Such uncertainty was tough for retirees and for those who are just on the cusp of retirement. According to Pew Research, 10,000 baby boomers reach age 65 each day. That is a trend that started in 2011, and that Pew expects to go on until 2029.

In other words, this uncharted territory can have a lot at stake. If you are nearing retirement, you may be wondering about your own financial future. Perhaps you are thinking about whether you should have some principal protection for some of your retirement money? Read More

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