• Best Practices New Normal
  • Digital Dentistry
  • Data Security
  • Implants
  • Catapult Education
  • COVID-19
  • Digital Imaging
  • Laser Dentistry
  • Restorative Dentistry
  • Cosmetic Dentistry
  • Periodontics
  • Oral Care
  • Evaluating Dental Materials
  • Cement and Adhesives
  • Equipment & Supplies
  • Ergonomics
  • Products
  • Dentures
  • Infection Control
  • Orthodontics
  • Technology
  • Techniques
  • Materials
  • Emerging Research
  • Pediatric Dentistry
  • Endodontics
  • Oral-Systemic Health

Learn About the Types of Annuities


Annuities earn a lot of press, much of it skeptical. But they can be an important part of your financial picture, if you know what you're getting into.

If you read much about personal finance, you've probably heard a lot of strong opinions about annuities. The fact is, annuities can be an important piece of one's financial puzzle, but they aren't right for everyone. In this first of a three-part series, we'll attempt to explain the basics of annuities. Our goal here is to give you the basics, and to simplify the concept of annuities as much as is possible. Once you determine which type of annuity you’re interested in, you’ll want to do more in-depth research and consult a financial professional.

Immediate vs. Deferred Annuities

An Immediate Annuity is just as it sounds—income commences within one year of purchase and will continue for either a specified period or for the life or lives of the annuitants, depending on the payout option you choose. Those options include:

• A “Life with Period Certain” annuity pays an income for a period selected by the owner. If the annuitant dies before the end of the Period Certain, payments will continue to the beneficiary for the remainder of that period.

• A “Life” annuity pays an income for the lifetime of the annuitant, or, in the case of two annuitants (a “Joint and Survivor” annuity), so long as either annuitant is alive.

• A “Life Only” annuity pays an income until the annuitant (or surviving annuitant) dies, at which point the annuity expires without value, even if death occurs shortly after issue.

• A “Life with Refund” annuity pays an income for the greater of the annuitant’s lifetime or the expiry of the refund feature. The refund feature may be either a Period Certain (e.g.: 10 years) or a Cash or Installment Refund (where payments will persist for the greater of the annuitant’s lifetime or until the entire purchase payment has been paid out.

A deferred annuity is so named because payout may be delayed, at the option of the owner, until much later in life. A deferred annuity gives you the potential to accumulate tax-deferred funds over time before you begin to receive payments. Because your money isn’t taxed until it’s withdrawn, it has the potential to accumulate more quickly. Then, when you withdraw money, you only pay taxes on the amount your investment may have earned above your principal.

Fixed vs. Variable Annuities

Fixed annuities are CD-like investments issued by insurance companies. They pay guaranteed rates of interest. Fixed annuities can be deferred or immediate. Immediate annuities make fixed payments, determined by your age and the size of the annuity, during retirement. Fixed annuities are popular because they require low investment, fewer decisions from the annuitant, and because they are predictable. But fixed payments will not rise to keep up with inflation, so your purchasing power may erode. This is especially true if you retire young and collect payments over a longer period.

Also, “fixed” is a bit of a misnomer, as rates may drop after the first year. If you are unhappy with the new rate, you can withdraw your investment early, but it will be subject so potentially large surrender payments.

Variable annuities allow you to choose from a selection of investments, and then they pay a level of income in retirement that is determined by the performance of the investments you choose. Unlike their fixed counterparts, variable annuities can appreciate. As with fixed annuities, gains are not taxed until withdrawal. This potential growth could help you keep up with inflation. But they bring more risk as well. If the investments you choose for your annuity decline, the value of your annuity will also decline. There are also important tax implications for gains, plus a 10% penalty if you withdraw funds before age 59 ½.

In addition to potential surrender charges, taxes, and investment losses, variable annuities also have fees, and this is where the bad rep for annuities typically comes in. Sales commissions for variable annuities can run as high as 4%, and ongoing maintenance fees—including management fees—can run as high as 2-3% per year. John Oliver had a field day with annuity fees, and rightfully so.

Variable annuities are potentially suitable for investors who have maxed out contributions to other retirement vehicles. Consider all the fees involved in a variable annuity, the claims-paying ability of the issuer, and the recent performance of the issuer’s funds, keeping in mind that past performance is no guarantee of future results.

That was easy, right?

Well, we’ve only covered certain types of annuities and the provisions they may have. The key thing for dentists—or any investor—to remember is that the devil is in the details with annuities. Investors considering them should be prepared to read the fine print, ask a lot of questions, and perhaps work with an advisor. Because despite their bad reputation, annuities have helped many people secure guaranteed income in retirement, a concept that may seem nice now, but may be essential to you later.

Related Videos
© 2024 MJH Life Sciences

All rights reserved.