Annuities are unique investment tools that are sold by insurance companies and provide guaranteed returns and/or income streams as you get older.
They are a great way to supplement retirement accounts or life insurance policies while providing a way of deferring taxes in the short or long-term. How do I know the difference between an annuity, life insurance, and an IRA?
Life Insurance vs. Annuities
Both of these products allow for tax-deferred investment growth, which means funds invested grow prior to any tax being taken, but is then taxed when it is distributed. Life insurance pays out to designated beneficiaries upon your passing tax free. Annuities can pay out a stream of income until your passing. The income can be just the earned interest or principal combine with the interest growth.
Life insurance offers options such as a simple payout upon your passing (term life) and some with investment components (whole life, guaranteed universal life.) Annuities can be set up to pay out over a specific time span (say, 10 years) or as a lifetime disbursement.
Still other fixed annuity accounts will defer your income for as long as you want. They grow tax-deferred and you are in complete control of any distributions. It’s more a matter of your financial objectives. You can take income now, later or not at all. At passing the interest gains would go to your named beneficiaries (not the insurance company), but unlike life insurance the gains may be taxed.
IRAs vs. Annuities
Upon reading the paragraph above, you may be asking yourself, “this sounds kind of like a retirement account – what’s the difference between an annuity and an IRA?” The biggest difference is that most IRAs are made up of stocks, bonds, and mutual funds. However, you can invest your IRA in an annuity if you wish.
IRAs are not usually established to generate guaranteed income, where annuities are insurance products specifically designed to generate income. Both IRAs and annuities allow for tax deferment, depending on whether you bought the product with pre- (traditional IRA, qualified annuity) or post-tax (Roth IRA, non-qualified annuity) dollars.
In other words annuities can mimic IRAs in some ways – and you can even invest your IRA in an annuity, but not all annuities are IRAs. Non-qualified fixed annuity accounts are not IRAs, but they do offer tax-deferred growth and future income streams.
The type of account and investments within said account are up to you. One size does not fit all, but with the recent market fluctuations there is more demand for safe, insured fixed annuities over stocks, bonds and mutual funds.
Comparing Annuity Accounts & Bond Portfolios
There are some very similar comparisons between the two depending on what types of bonds you’re considering. In fact some pundits recommend trying to make your own annuity by purchasing several bonds with different maturities.
The problem is you have to be a bond expert to do this – which you probably aren’t. If you were, you would be working for an insurance company buying the bonds that makes up most annuity accounts. Because corporate and government debt can swing wildly based on interest rate fluctuations, it’s best to leave investing to the experts.
Annuity policies do the work for you. They buy the best bonds then pass the bulk of the returns on to you in a tax-deferred package. We’re not advocating for no bond funds in your overall portfolio, but we are saying annuities avoid the risk of depreciation associated with bond values when interest rates rise.
Contact Us To Learn More About Annuity Accounts
The differences and advantages to these annuity contracts are best left to be explained by experts like Hyers & Associates. We are an independent annuity brokerage offering the highest fixed annuity quotes across the country.