- Probate Avoidance
- Financial Legacy and Bequest Motives
- Asset Protection
- Suitability
- Interest Rates
- Guaranteed Death Benefits
When a person passes away without a will, probate is a process used by courts to distribute the assets of the estate. The probate process can be time consuming and expensive, and can result in a loss of privacy.
Annuities avoid the entire probate process because the proceeds pass directly to the beneficiary who is named in the contract. This is a clear advantage of annuities.
Financial Legacy and Bequest Motives
With certain types of annuities and annuity payout options, there is a fundamental trade-off between purchasing an annuity and leaving an inheritance of heirs. In other words, in certain situations funds used to purchase an annuity will decrease the amount of money that might be passed along to heirs.
For example, a pure life annuity will offer guaranteed income for the life of the annuity owner. However, those annuity payments stop when the owner(s) die, and there is no contract value otherwise to be passed along. As a result, in this situation there is a clear trade-off between the guaranteed income and the potential size of the estate.
The above said, annuities can be very effective tools for passing guaranteed income to heirs—either through a trust or outside of a trust.
Assets in the form of an annuity contract are shielded from the annuity owner’s creditors in certain states.
An annuity purchased from an insurance company licensed and domiciled in Switzerland is fully protected from creditors.
Suitability boils down to whether an annuity product fits your needs.
In order for suitability to be attained, the financial advisor who is making a product recommendation needs to have an in-depth understanding of the product and how that product fits your needs.
As discussed throughout this buying guide, a comprehensive financial plan is the basis on which a sound product recommendation can be made. Any product pitch that is made in the absence of a deep understanding of the client’s situation and needs is likely on shaky ground.
Annuities are premised on the time value of money and interest rates are a key factor in the production of annuities.
Higher interest rates—and subsequently rates of return—allow insurance companies to generate more income from their invested capital over time and therefore—all other things being equal—provide higher payouts to annuity owners.
Buyers of fixed annuities should be especially aware of the interest rate environment. For example, interest rates in 2010 are at historic lows since the economy just experienced a deep recession and deflation is as much of a concern as deflation.
However, the level of inflation and interest rates could change dramatically within the next several years, and if this occurs, today’s fixed annuity buyers could see a significant decrease in the value of their future annuity payments.
Cost of living adjustments (COLA) or inflation protection can offset this risk in part. Laddering of annuity purchases over time can also help address interest rate risk.
Variable annuities provide death benefits that are payable if the annuity owner dies during the accumulation period. This death benefit no longer exists once the accumulation period ends and the payout phase begins.
Some variable annuities provide enhanced death benefits that will account for investment gains that may have occurred over the course of the accumulation period.
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