1. Gain Compounded Earnings While Deferring Income Taxes
Earnings within an annuity contract are tax-deferred. This means you don’t pay income taxes on the earnings until you withdraw gains from your account. Therefore, there are no annual 1099 forms to file or earned-interest entries to make on your 1040. Tax deferral also means that annuity earnings do not offset Social Security benefits as with earnings from bonds, CDs, and other investments. Income generated by tax-exempt municipal bonds (for which no federal income tax is due) must be counted to determine any offset to Social Security benefits. Investors with investments currently allocated as “cash” should consider annuities for their tax deferral benefits. Over time, tax-deferred compounding may produce a greater overall return than other non-qualified investments.
2. Earn Higher Interest Rates
Fixed index annuities may credit higher interest rates than bank CDs or fixed interest rate deferred annuities.
3. Make Contributions to Your Tax-Deferred Account
Investors who have maximized contributions to their qualified retirement plans (i.e. 401k, IRAs and pensions) are permitted to contribute without limit to a tax-deferred annuity.
4. Protect Your Principal from Downturns in the Credit Markets
When interest rates trend upward, annuity accounts are insulated from loss of principal; increasing interest rates often negatively impact government bonds and bond mutual funds. Unlike bonds which lose principal value during periods of rising interest rates, the account value of a fixed index annuity is guaranteed. In addition to offering loss protection, if your annuity contract offers annually renewing rates, you may be presented with higher cap rates or participation rates, reflecting increased prevailing interest rates. In short, your principal and earnings are protected no matter what direction interest rates may take.
5. Retire Early Without Penalty
Annuities can offer valuable tax-savings for employees under the age of 59½ who receive large, lump-sum distributions from their 401(k) profit-sharing plans as part of an early retirement or severance package. Such amounts can be “rolled over” into an annuity policy without having to recognize taxable income. Penalty-free withdrawals can then be taken by setting up a program known as “Substantially Equal Periodic Payments” (SEPP). This exemption to the IRS pre-59½ early-withdrawal penalty allows you to withdraw funds from a tax-deferred account you thought couldn’t be touched until retirement!
6. Satisfy Required Minimum Distributions (RMDs)
Retirees over the age of 70½ are required to begin taking withdrawals from their IRA or Pension plans, known as Required Minimum Distributions (RMDs). The IRS penalty for not doing so is a substantial 50% of any amount that falls short of the Required Minimum Distribution. IRA funds rolled over into a fixed index annuity will be monitored for RMD amounts by the insurance company free of charge. This can save you the annual fee that your accountant or attorney would otherwise charge for making these calculations.
7. Retire With Lifetime Income
Today, a healthy 65 year old male has a 25% chance of living to age 90; a 65 year-old woman is likely to live even longer. Retirees concerned about outliving their investments can protect themselves by creating a guaranteed lifetime income stream.. By “annuitizing” your IRA or fixed index annuity, you can exchange its value for an “immediate annuity” income stream in any of several forms (see earlier discussion on “Immediate Annuities”). Many FIAs offer optional income riders which provide withdrawal benefits similar to immediate annuities. This type of annuity provides you with a monthly check, guaranteed to remain constant over the duration of your lifetime.
8. Create Probate-Free Inheritance
The legal process of going through probate was established to protect a decedent’s estate and to insure its proper distribution to designated heirs. Probate can be a time-consuming and expensive experience for heirs to endure. Purchasing an annuity is one way to protect your beneficiaries from having to undergo this costly delay in estate distribution. Your named beneficiary or beneficiaries are paid directly and promptly, as soon as the insurance company has been notified about your passing.
Everyone’s looking forward to retirement with places to go, people to see and things to do. But we’ll still have bills to pay. Social security can help, but you all need more than its benefits can provide. And if you have retirement income from your 401(k) plan, that income will be taxed and may actually cause your social security benefits to be taxed! If that happens, you may not be able to go to all the places you want to go, see the people you want to see and do the things you want to do. All because of taxes!
Today there’s a way for you save for retirement that can put more money in your pocket and let you keep more of your social security benefits. Plus, it allows you to access market returns without market risk. It’s called Indexed Universal Life Insurance (IUL)*. Every month you can contribute to your IUL* using the strategy of dollar cost averaging that helps even out the highs and lows of the index. Many Americans use the S&P 500 index. There are many other American indices to choose from, as well as foreign indices.
Of course, like all retirement plans, IUL* has plan expenses too. But over time it could be the most cost effective way to save for your golden years. IUL*, with its tax advantages, market potential and safety, is a great way to save for retirement.
When you’re looking forward to retirement, it’s more than just paying the bills. It’s about going places, seeing the people, and doing the things you want to do.
*Indexed Universal Life insurance (IUL) tax free income is predicated on a combination of withdrawals to basis and policy loans of gain from a maximum funded TAMRA compliant contract kept in force for the life of the insured.
By Steve Savant, syndicated financial columnist and host of the daily talk show, “The Business Insurance Zone”
What Is Universal Life Insurance?
Universal life insurance contracts differ from traditional whole life policies by specifically separating and identifying the mortality, expense, and cash value parts of a policy. Dividing the policy into these three components allows the insurance company to build a higher degree of flexibility into the contract. This flexibility allows (within certain limits) the policy owner to modify the policy face amount or premium, in response to changing needs and circumstances.
A monthly charge for both the mortality element and the expense element is deducted from a policy’s account balance. The remainder of the premium is allocated to the cash value element, where the funds earn interest. Unlike traditional whole life policies, complete disclosure of these internal charges against the cash value element is made to the policy owner in the form of an annual statement.
Many universal life policies have several different provisions by which the accumulated cash value can be made available to a policy owner during life, without causing the policy to lapse. If a policy is terminated without the insured dying, there are various surrender options for the cash value.
There are two primary types of universal life, based on the level of death benefits:
Type I universal life: Also known as option A, type I universal policies pay a fixed, level death benefit, generally the face amount of the policy.
Type II universal life: Also known as option B, type II universal policies generally pay the face amount of the policy plus the accumulated cash values. As the cash values grow, so does the potential death benefit.
Common Uses of Universal Life
Universal life policies are useful for policy owners who expect their needs to change over time. Within certain guidelines, a universal life policy can be modified by changing the death benefit or premium payments. Some common uses are:
Family protection: To provide the funds to support a surviving spouse and/or minor children, or to pay final bills such as medical or other estate expenses, as well as federal and state death taxes.
Business planning: Because of its flexibility, universal life insurance is often used for many different business purposes, such as insuring key employees, in split-dollar insurance arrangements, and funding nonqualified deferred compensation plans. Business continuation planning often involves using universal life as a source of funds for buy-sell agreements.
Accumulation needs: Some individuals will use the cash value feature of universal life as means of accumulating funds for specific purposes, such as funding college education, or as a supplemental source of retirement income.
Charitable gifts: To provide funds for a gift to charity.
Modified Endowment Contracts (MECs)
A life insurance policy issued on or after June 21, 19881 may be classified as a modified endowment contract (MEC) if the cumulative premiums paid during the first seven years (7-pay test) at any time exceed the total of the net level premiums for the same period.
If a policy is classified as a MEC, all withdrawals (including loans) will be taxed as current income, until all of the policy earnings have been taxed. There is an additional 10% penalty tax if the owner is under age 59