Save Smart, Earn More by Dennis Blitz

Author:Dennis Blitz
Language: eng
Format: epub
Tags: ebook, book
Publisher: Adams Media, an imprint of Simon & Schuster, Inc.
Published: 2008-07-15T00:00:00+00:00

12: Annuities

* * *

Peace of Mind at a Price

Mark is the first to bring up the obvious point: “You must be kidding. I’ve never heard anyone suggest that insurance is an investment.” “True,” I say, “but even though you may not immediately make that connection, the insurance industry has stepped in to provide investment-type products.”

If you consider an investment to be a situation in which you place your funds in an asset with the intention that you or your heirs will receive a greater amount of money in the future, then many insurance products fit that description. Moreover, if you look at a variable annuity contract, you find that it is clearly an “investment contract,” using a 1946 U.S. Supreme Court definition that a security is a “contract whereby the earnings depend solely on the efforts of a promoter or third party” ( Securities and Exchange Commission v. W.J. Howey Co., 328 U.S. 292 [1946]).

So, when referring to insurance company products as investments, our focus will be on annuities. For our purposes, the interesting thing about annuities is that during the annuity accumulation period (the time when you are putting money into the annuity), there is an interface with Rule Six.

Carol, quickly flipping the pages of her notepad, says, “That’s the Take Charge of One Investment rule. In my notes I called it the ‘Do it yourself and save rule,’ but you can’t create your own annuity, can you?”

“No, not entirely, but you can get surprisingly close and save a lot of money along the way. By the end of our discussion, I think that you’ll see what I mean. But first let’s set the groundwork and get an understanding of the products offered by insurance companies.”

Annuities are divided into three basic categories: fixed, variable, and indexed. During the withdrawal period, annuities offer guaranteed income under the provisions outlined within the contract.

If you are considering buying an annuity, remember the discussion of guarantees and their related costs from Chapter 1 : If an annuity or any insurance-based product has a feature or benefit, the feature or benefit comes at a cost.

Determining that cost is no small task. No one can hold a candle to the insurance industry when it comes to taking a simple concept and piling on so many options and features that comparing one company’s product with another can be nearly impossible. To address this problem, we’ll limit this discussion to the most basic product features.

Costs and Tax Treatment of Annuity Contracts

One key tax feature of insurance products is that the IRS allows for a tax-deferred buildup of gains inside life insurance products. Even though an annuity is much more a savings or investment product than it is insurance, insurance companies are anxious to retain the tax-deferred treatment of any gains that might be earned while holding the annuity contract. To be sure annuities qualify for the same tax-deferred internal buildup granted to insurance products, the insurance companies presented the concept of annuities to the IRS as a retirement-planning vehicle.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.