by Robert Messinger
Regardless of your current financial situation, discovering more about the estate planning process is always a wise idea. After all, few of us leave this earth with nothing, and most want to ensure that our heirs, not the state, get our assets. One powerful but sometimes overlooked tool for estate planning is an annuity. You probably know that an annuity is a contract between an individual and an insurance company. In exchange for a lump sum or series of payments, the annuity issuer provides the annuitant with regular, predictable payouts.
What is less obvious, however, are the multiple ways annuities can be used, including estate planning. Selecting the ideal annuity for this purpose requires careful research and a thorough appraisal of your financial objectives and circumstances.
No matter how financially savvy a person may be, an annuity can be a complicated, nuanced product with many configurations. For this reason, I always recommend that potential annuity buyers consult a retirement income specialist experienced in all aspects of this powerful financial tool.
What are the different types of annuities?
Fixed annuities: A low-risk option is the fixed annuity, created to give you stable, predictable, and guaranteed income during retirement or as part of an estate plan.
A fixed annuity contract guarantees a rate of return for a stated period, typically several years. A key advantage of a fixed annuity for estate planning is preserving your capital and giving your heirs steady, guaranteed payments after you pass. The downside for some is that a fixed annuity is a more conservative instrument and may not offer as much growth potential as other products.
Variable annuities: While potentially riskier, variable annuities appeal to some estate planners because they can offer greater flexibility and growth potential. You might see higher returns since returns correlate to underlying investment options, such as stocks or bonds.
However, it’s critical to note that these higher returns may involve taking on more significant risks as the market is often volatile and unpredictable. Estate planning with variable annuity products might result in a more considerable inheritance for your beneficiaries, but it could also expose them to market losses.
Indexed annuities. Blending features of fixed and variable annuities, indexed annuities offer returns linked to a particular market index, such as the S&P 500. An indexed annuity aims to give you market gains while protecting you from losses if a market downturn occurs. Depending on your risk tolerance and goals, indexed annuities may be a suitable choice for your estate plan and give you a balance between growth and safety. You must, however, do thorough research and due diligence, as each annuity contract has different terms and conditions.
Now that I have given you an overview of the three main types of annuities, here is what I suggest to help you find the contract that best aligns with your estate planning needs.
Constantly evaluate your risk tolerance.
An honest appraisal of how much portfolio risk you are willing to stomach is paramount to selecting the right annuity. For example, if you prize stability and guaranteed income, you might consider fixed products. On the other hand, if you don’t mind risk and want potentially higher returns, a variable or indexed product may be the best fit. It is a good idea to consult an annuity expert with a deep knowledge of the available products and an understanding how they work in an estate plan.
Take a look at the death benefit.
An annuity’s death benefit is one factor to consider when choosing which annuity to include in your estate plan.
The death benefit determines how much your heirs will get when you pass. Some annuity contracts offer a “return of premium” death benefit.
This provision ensures that your designated beneficiaries will get at least the initial investment amount, regardless of what the market is doing. Other annuities provide a “stepped-up” death benefit. A step-up guarantees your beneficiaries will get the annuity’s current value rather than the original investment.
Do a breakdown of annuity fees. Many annuities come with various fees, such as administrative charges, investment management fees, and mortality and expense fees. These charges, like those found in 401ks or IRAs, will likely impact the overall returns and the amount available for estate planning. Don’t purchase any annuity until you thoroughly understand the associated costs and how these expenses might affect you now and in the future.
Know your payout options. Before signing the dotted line, explore your annuity’s payout options. Most of these products give you more than one choice for receiving payments during retirement or passing them on to loved ones. A few standard payout methods include:
- Single-Life Payments: This is a straightforward method where payments only continue for the annuitant’s lifetime. There is nothing paid to a spouse or other beneficiary.
- Joint and Survivor. In this scenario, the annuitant gets payments for life and their spouse’s life. This arrangement provides a measure of financial security for the surviving spouse.
- Period certain. As the name implies, this option guarantees payments for a specific, agreed-upon time, even if the annuitant dies before that term ends.
- Lump-sum. In this scenario, your beneficiaries will get the entire annuity’s value as a lump sum.
Caveat: Annuities, like most financial products, have tax implications for you and your heirs. I highly recommend sitting with a retirement income specialist who can educate you on the tax advantages of annuities and give you an honest assessment of potential tax issues.
Summing it up: Annuities may be a valuable tool for estate planning. They can provide you with predictable, stable, and tax-advantaged income. An annuity in your portfolio can give you peace of mind by ensuring that your assets will be distributed according to your wishes.
However, this is a somewhat complicated product. You’ll need initial guidance to determine what type of annuity you should add to your estate plan. You may also want a second opinion before committing.
A qualified retirement income specialist specializing in annuities can help you make the best choice with your risk tolerance, legacy goals, and current financial situation.
If you are considering an annuity for estate planning or any other purpose, contact me. I will be happy to review your choices and provide an expert second opinion at no cost.
(413) 330-8748
rmessingerretirementplanning@gmail.com
