Using a Variable Annuity for Guaranteed Income

One of the recommendations from the White House Task Force on Middle Class Working Families was for retirees to purchase annuities to help reduce the risks of outliving their savings or experiencing lower living standards because of inflation and investment losses.1

The White House is not a common source of retirement information, but its recommendation addressed a common concern: running out of money in retirement. Although the task force wasn’t talking about variable annuities in particular, one of the benefits offered by variable annuities is the potential for a guaranteed lifetime income.

If you have wondered whether your retirement portfolio will be able to go the distance, you might want to learn more about variable annuities.

An Investment in Insurance

A variable annuity is an insurance contract that is typically funded with either a lump sum or a series of premium payments. The term variable derives from the variable return potential. During the accumulation period, the contract holder can direct his or her premiums to be invested among a variety of subaccounts, which pursue returns in the financial markets. The subaccounts offer varying degrees of risk, allowing contract holders to pursue investment returns according to their risk tolerance, long-term goals, and time horizon.

When the contract holder is ready to begin receiving a retirement income, the amount of income available depends on the contract value, which is determined in part by how the investment subaccounts performed during the accumulation period.

A lifetime income is one of several payout options. Contract holders may also select an income that lasts for a specific number of years or for the lifetimes of two people. For an additional cost, contract holders may be able to purchase guarantees, such as a guarantee of minimum fixed income payments or a guarantee to withdraw a specific amount over a lifetime, regardless of the account value.

There are contract limitations, fees, and charges associated with variable annuities, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Withdrawals reduce annuity contract benefits and values. Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. Withdrawals of annuity earnings are taxed as ordinary income and may be subject to a 10% federal income tax penalty if made prior to age 59½. Surrender charges may also apply if the annuity is surrendered in the early years of the contract. Any guarantees are contingent on the claims-paying ability of the issuing company. The investment return and principal value of an investment option are not guaranteed. Because variable annuity subaccounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered.

Variable annuities are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Kiplinger’s Personal Finance, May 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.
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Investors should consult with their own professional advisor regarding the potential tax, estate, and legal considerations that may arise in connection with entering into a life settlements transaction. Proceeds from a life settlement transaction may be taxable under federal or state law to the extent the proceeds exceed the cost basis. The proceeds from a life settlement transaction may be subject to claims of creditors. The receipt of proceeds from a life settlement transaction may adversely impact eligibility for government benefits and entitlements.  The amount received for the sale of the Policy may be impacted by the circumstances of the particular purchaser of the Policy, the insured’s life expectancy, future premiums, the death benefit, the terms of the Policy, and the current market for insurance policies, among other factors. The amount received for the sale of the Policy may be more or less than what others might receive for the sale of a similar policy. There may be high fees associated with the sell of a Life settlement. 

Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as a financial planner.