7 Advantages of Annuities

Annuities are investment vehicles that are designed to offer a stream of income for a specified period of time. Annuities have a number of benefits including a guaranteed income for life and tax-deferred growth. This article will cover 7 major advantages to owning an annuity.

  1. The guarantees of safety, interest rates, and particularly lifelong income (if selected) give the purchaser peace of mind and psychological security.
  2. An annuity protects and builds a person’s cash reserve. The insurer guarantees principal and interest (in the case of a fixed annuity; a variable annuity is subject to the performance of the underlying selected subaccounts), and the promise (if purchased) that the annuitant can never outlive the income stream. This makes annuities particularly attractive to those who have retired and desire, or require, fixed monthly income and lifetime guarantees.
  3. An annuity allows a client to invest in the market while moderating risk. The insurer may provide guarantees of death proceeds or a certain annuitization amount (if purchased) within a variable annuity, thus providing clients with guarantees that otherwise would be unavailable to those clients who purchased the underlying investments directly. This makes a variable annuity particularly attractive to those clients who have retired or are nearing retirement and need (or want) to hold riskier investments while trying to moderate risk.
  4. A client can time the receipt of income and shift it into lower bracket years. This ability to decide when to be taxed allows the annuitant to compound the advantage of deferral.
  5. Because the interest on an annuity is tax deferred, an annuity paying the same rate of interest (after expenses) as a taxable investment will result in a higher effective yield.
  6. Because of the risk management factors available, especially in variable annuities, clients may be able to take on greater risk in the underlying investment options (e.g., equities, smaller capitalization equities, high yield bonds, etc.) while still maintaining a reasonable overall risk exposure due to the underlying guarantees.
  7. Adjusted Gross Income (AGI) may be reduced in years where the annuity is held with no withdrawals (thanks to the tax deferral features of the accumulation phase). In addition, annuitants may recognize less taxable income during the payout phase, due to the partial recovery of basis associated with each payment. A reduced AGI can bring tax savings, as many other income tax rules are calculated based upon AGI and, generally, a lower AGI results in lower taxation (and vice versa). A reduced AGI can create tax savings by lowering the amount of Social Security includable in income, reducing the floor threshold for deduction of medical expenses (10 percent of AGI) or miscellaneous itemized deductions (2 percent of AGI), and avoiding the threshold for phase out of exemptions and itemized deductions.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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