When people get older, they tend to start making plans for the future. As a senior, one of the most significant decisions you’ll have to make is what to leave behind and to whom. The only trouble is that there are many different options to ensure that your loved one will have money upon your passing. While there are certainly plenty of options, not all of them are particularly advantageous, especially when you take taxes into account.
One of the most common financial tools seniors choose to use to leave money to their loved ones is an annuity, but is it right for you? If someone has been pressuring you into purchasing annuities or you’re interested in the best way to make sure your loved one is taken care of, you’ll want to read this article.
What is an annuity?
People like to throw financial terms around a lot without fully understanding them. You must learn what an annuity is before signing anything. An annuity is an insurance product. More specifically, it’s an insurance product where the buyer makes deposits during their working years to receive distributions after retirement for the rest of their lives. You agree to pay periodic premiums or one sizeable lump-sum payment to an insurance company to grow tax-deferred until retirement. At that point, you can exchange the annuity value for regular payments that you cannot outlive. If you pass before you begin receiving payments or before you’ve received a pre-determined number of payments, your spouse or beneficiary will receive the payments.
Is an annuity a good idea?
At this point, you might be wondering whether annuities are a good idea or not. The answer to this is somewhat complex; however, in short, one could argue that annuities have many features that may make them seem too complicated to be worth the trouble. For example, rather than making payments on an annuity with the expectation of receiving payments to supplement your income during retirement, why not just save the money yourself over the years? Annuities can be useful for folks that lack the financial discipline not to touch their savings. If you are constantly spending through your savings and buying frivolous things, an annuity might make sense as it will keep you on track. That said, if you already have trouble preventing yourself from dipping into savings, you could easily come up short and miss an annuity payment.
Before you sign any applications, you should know about the drawbacks associated with annuities. For starters, if you have a financial emergency and withdraw funds from your annuity during the surrender period, you could be charged surrender fees from your insurance company in addition to taxes and other penalties. The surrender period refers to the number of years after purchasing the annuity, where the insurance company will charge you a fee if you withdraw cash. The length of time and the amount of surrender charges vary from one insurance company to another and from product to product. Insurance companies use the principal in your annuity to make a profit. By withdrawing money out of the annuity during the surrender period, the insurance company has not recovered their marketing costs, including any commissions paid to agents, hence the penalties and fees. When it comes to annuities, the surrender fee isn’t the only fee you have to worry about. Other fees may be charged depending on the type of annuity.
These fees include but are not limited to sub-account fees, investment transfer fees, administrative fees, state premium taxes, contingent deferred sales charges, principal protection fees, as well as mortality and expense fees. Depending on your product, you may also have to pay additional fees if you wish to have inflation protection/cost-of-living adjustments, lifetime income, or long-term care rider. With so many different fees, you may be wondering why anyone would want an annuity in the first place. Of course, these fees are not prominently advertised by insurance companies. Many folks decide that the costs that are commonly associated with annuities outweigh the benefits.
What other options do you have?
As it turns out, you do have other options. Annuities are by no means the only financial vehicle for retirement or to make sure your loved ones are well taken care of financially. You could put money aside in a savings account and stipulate that the funds will be given to a loved one of your choice upon your death. Alternatively, many choose to take out life insurance policies instead.
When you have a life insurance policy, you can designate a beneficiary that will receive the death benefit once you pass away. Unlike with an annuity, you risk losing your coverage should you be unable to make your premium payments. That means that after many years of making payments on time, your policy could terminate if you miss two or more premiums, unless you have enough cash value in the policy to cover the premiums. That’s why so many seniors choose to sell their life insurance policies as they start to become unaffordable or are no longer needed in a profitable transaction called a life settlement.
What you need to know about life settlements.
A life settlement is a transaction in which a life insurance policy is sold to a licensed third-party buyer for a lump sum payment. Life settlements are an attractive choice for seniors that own policies they no longer need, want, or can afford.
Get in touch with MRE Finance!
Now that you have discovered the advantages that a life settlement may offer, it’s time to find a buyer for your policy. Luckily, you don’t have to do it alone; MRE Finance has a team of experts that can help you find a suitable offer for your life insurance policy.
Want to find out what your policy could be worth? Try our Free Life Settlement Calculator and receive an estimated value of your policy in minutes. If you prefer to speak with someone, give us a call at 1-800-521-0770.