Annuities and Life Insurance—More Income investment Options

Investors approaching retirement or others that are seeking regular income from investments in case of a recession, Pandemic, etc. should explore all options.

Some investors are risk averse and minimize stock investments. But what if fixed income returns are low. Where would they turn. Others shun bonds, but may find stocks in a bear market.

What if you have some money to invest for retirement but have already maxed out you 401 K plan?

Annuities could be considered as part of a retirement planning strategy especially if you are seeking a relatively risk-free investment vehicle to help guarantee income for as long as you live.

So what exactly are annuities? This can be a device to collect income in regular monthly payouts. In its basic form an annuity is a contract that an insurance company and the investor reach whereby the investor pays the insurance firm for the annuity a set sum or payments over a specific period. The funds are invested by the insurance firm and from the earnings pays the investor in a lump sum or disbursements over a time period.

Investors need to make sure they understand the range of annuity possibilities.

First there is the immediate annuity. Here the investor begins to receive periodic payments right after agreeing to the contract and paying the lump sum to the insurance firm. This type of alternative could work well for an investor who recently came into a substantial amount of money and wants to invest it in income for retirement.

Then there’s deferred annuities. This option might work for investors who want to put away funds for regular income during retirement which might be some years down the road. Here the funds put away grow through investments and are tax-free until income is withdrawn. Since the capital accumulates over time, this period is known as the accumulation phase.

How do you invest in deferred annuities? Investors have the option of paying the insurance company a lump sum, or if you are working, you can pay in regular contributions. You can also do both.

Deferred annuities come in several flavors. Some deferred annuities are variable meaning the amount you receive varies depending on investment growth. This carries some risk since the value of your investment could decline and end up in losses. Investors with a relatively long investment time horizon and those able to tolerate changes in the markets might find variable deferred annuities appropriate.

More risk averse individuals who would rather not gamble on growth or loss might opt for deferred fixed annuities. Here they would have the peace of mind knowing that they are guaranteed a set rate of income for a specified number of years.

A deferred variable annuity with a guaranteed minimum accumulation benefit (GMAB) provides you the potential to benefit from any market gains while at the same time protects your original investment from any market downturns over a specific period of time.

It is possible to acquire a deferred variable annuity which can grow the fund investment yet guarantee at least a minimum income or “accumulation benefit.” The investor has the ability to profit when the market rises while the original investment is shielded from market downturns over a specified period.

An Objective Assessment

Annuities have the advantages of offering a sort of insurance for retirement income at low risk. In addition, it has the 401 K type benefit of accumulating value on a tax-deferred basis. There is the benefit of tax-free compounding of assets in advance of regular income for retirement.

However, the investor would be wise to look at the fine print of the agreement. Taxes kick in when your payouts begin. Usually there are penalties for early withdrawals. In addition, there can be substantial fees.

It’s essential that the investor understand his or her financial goals and how a particular type of annuity fits in. This requires you to seek the advice of a trusted insurance broker or financial adviser.

Another possible drawback is that annuities may not deliver the kind of market gains as you would derive from directly investing in the market. Your annuity investments will not grow by the same amount that the stock market grows. That’s because annuity fees are consuming some of those gains.

Is Life Insurance an Effective Income Producer?

Life insurance serves many purposes but its main goal is to provide funds for your loved ones in the event of death.

Term life insurance is a less expensive alternative but only runs for a fixed period and provides no other value than insurance.

On the other hand, whole life or permanent insurance lasts for life and only terminates if you default on payments.

Though more expensive than term life, whole life policies build cash value. This cash value belongs to you. Some policies also earn interest or dividends on a tax-deferred basis. Many individuals rely on the cash value of their whole life policies in case they need extra income in retirement. The funds can be withdrawn or you may be able to take a loan against the value of the policy.

Whole life, variable life and universal life insurance are examples of cash value life insurance. Some financial advisers advocate adding cash value life insurance to the retirement income planning mix for the reason that the value is not tied to the stock market. So if you need cash for income during retirement and the market is down, you need not sell stock to derive income. You can take some funds from your life insurance policy.

Taxes are deferred on earnings until withdrawn from the policy and distributed. Once distributed, earnings are taxable at the policyholder’s standard tax rate. If you’re receiving dividends, you won’t owe tax on them until they exceed the total amount of premiums you’ve paid.

In the final analysis, annuities make a viable income-producing option especially if you start the policy prior to retirement and build value. Life insurance’s primary goal is insurance protection against death but cash value policies can also serve as a supplemental income or to fill the need for a cash infusion.

Annuities and Life Insurance—More Income investment Options

An Objective Assessment

Is Life Insurance an Effective Income Producer?

Generate Passive Income From Revenue Producing Investments

INVESTMENT INCOME NEWSLETTER

PRIVACY POLICY