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Weigh Tax Benefits of Annuities & Life Insurance


The basic purposes for annuities and life insurance are straightforward; the first offers a steady stream of income in retirement and the second pays death benefits to your heirs to help them survive after you are no longer around.  But according to Paul Sullivan of The New York Times, insurance companies are now touting the tax benefits of these two products.  In “Getting the Full Picture on Annuities,” Sullivan says there is more to it than just the simple tax benefits offered and wants to make sure that everyone knows the full picture.  Just as the money in your retirement accounts grows without taxes, your annuity and life insurance money grows the same way.  With an annuity, you will pay ordinary income taxes when you start receiving payments.  Permanent life insurance pays your heirs death benefits without any income taxes owed.

Sullivan wants to make sure that everyone is aware of some of the downsides associated with these insurance products as well.  Some types of products have high management or upfront fees and most offer stiff penalties if you try taking the money out right away.  So of course it goes to say that you should compare purchasing an annuity or life insurance policy with other options out there.  The tax benefits are important right now because of all of the current tax issues in the government.  This is similar to annuities being sold for their guaranteed high returns just a few years ago when people were worried about getting high returns.  With changing times, the desirable benefits change as well.

It’s important to weigh the tax and other benefits of annuities and life insurance against the costs to see if they are a good product for you or not.  The article says that annuities are important for people who are scared they will run out of money in retirement.  Those who have between $250,000 and $500,000 in savings are good candidates.  They can purchase an annuity to make up for the difference between their Social Security payments and their necessary expenses in retirement.  If you think you’ll need to access your money in the next few years, deferred annuities or life insurance are not good options for you.  Sullivan goes as far as to call them awful at separating people from their money.  But annuities are meant to provide a guaranteed lifetime stream of income, not to be a savings account from which you can withdraw whenever you choose.  Those won’t last over your lifetime.

Two of the favored annuities in the article are older products that still offer great guarantees and low-cost deferred annuities.  Newer annuity companies offer these low cost products that take advantage of tax-deferral and offer low management costs by eliminating a lot of the extras.  Jefferson National is one of the companies offering these low-cost annuities.  They found that once annuity management fees go over 1%, the benefit of deferring taxes is nullified.  Their fees are only around .10% and they don’t pay commissions to the advisors selling their annuity products.  Clients who have maxed out other tax-deferred retirement savings vehicles and those in states like New York with very high taxes can also benefit from the tax benefits of annuities.  Balance the benefits versus the costs for your annuity and life insurance purchases before simply buying them for one benefit like tax deferral.

Written by Rachel Summit

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