The risk and return characteristics of fixed and variable annuities are so fundamentally different that each type is more or less suitable for various purposes. However, some form of annuity would be indicated in the following circumstances:
- When investors want a retirement income that they can never outlive.
- When investors (often retired) want a monthly income equal to or higher than could be generated by other conservative investments and are willing (or especially if they want) to liquidate principal.
- When persons would like to avoid probate and pass a large sum of money by contract to heirs to reduce the possibility of a will contest.
- When investors desire a tax deferred accumulation of interest. The interest earned inside an annuity owned by an individual grows income tax-free and is not taxed until it is withdrawn.
- When investors want to be free of the responsibility of investing and managing assets (in the case of a fixed annuity or an annuity payout; this is not applicable to a variable deferred annuity, as the owner still retains the burden of making all investment selections).
- As a supplement to an IRA. With limited opportunity for pretax contributions to IRAs, many clients are seeking opportunities of making regular after-tax contributions to an investment vehicle after reaching the IRA contribution limits. The annuity may be a good choice because contributions are not limited.
- Fixed annuities, in particular, would be indicated: (a) when safety of principal is a paramount consideration (this can be particularly important in some retirement planning scenarios); (b) when investors want a guarantee that a given level of interest will be credited to their investment for a long period of time; or (c) when investors desire a conservative complement to other investment vehicles.
- Variable annuities, in particular, would be indicated: (a) when investors want more control over their investment and are willing to bear the risk associated with their investment selections; or (b) when investors are looking to increase their potential retirement income.
- When investors would like to invest their money in the types of vehicles available in variable subaccounts, but desire some aspect of risk management, such as the guaranteed death benefits or living benefits offered by most insurance companies.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM