Before You Annuitize an Annuity, Shop Around for the Best Rate

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Cheerful senior couple having fun while riding on rollercoaster at amusement park. Copy space.


It pays to shop around for annuity rates.

Here is the thing. Much like car insurance rates, annuity rates change all the time. Insurance companies introduce new annuity products and retire, for lack of a better word, other outdated products. The industry is extremely competitive and constantly changing.

For this reason, it is recommended that not only should you shop around, but you should also get shorter term annuities until you are ready to receive monthly income to fund your retirement. 

If you purchase your first annuity at the age of fifty, for example, then you can get a ten-year tax-deferred annuity. This annuity is designed to help you save while you are still in your working years. Once the ten-year deferred annuity has matured, you should begin the process of shopping around again, as opposed to automatically staying with the same company for your next annuity.

This is, unfortunately, a mistake that countless retirees have made, and it is often a costly mistake. There are considerable savings to be gained by shopping around for rate comparisons.

The process of purchasing an annuity is rarely a quick and simple decision. Always get competitive annuity quotes from an independent fiduciary financial advisor. By getting your financial advisor to find the perfect product for you, even if it takes months, it can result in substantial savings.

What is Annuitization?

All annuities – whether fixed, indexed or variable – are tax-deferred products, until you annuitize them.

Annuitization usually means that you use the same insurance company that issued your existing deferred annuity product to begin receiving income on a new, immediate annuity product. 

Annuitization can also be described as exiting the growth stage and switching to the distribution stage. At this stage, you will start paying taxes on the income which is distributed.

By getting a short-term, deferred annuity for your growth stage, your investment will grow on a tax deferred basis. That is what the annuity is designed for. 

When the time comes that you enter the distribution phase (when you begin receiving monthly income), you will want a different annuity entirely – one that was designed for providing you with monthly income.

If instead of annuitizing, you decide to cash in the ten-year deferred annuity at the end of the term for a lump sum payment, you would then pay income tax on the full gain all at once. Not only will this increase your tax bill for that year, but it may also even bump you into a new tax bracket. And that is never fun.

Additionally, ten years will have passed since your first annuity. Not only will new products with potentially higher rates have become available for you to choose from, but you can now also purchase an annuity designed for someone who is 60. 

The 1035 Exchange

If you roll the pre-existing annuity into a new annuity product from a different provider, you won’t have to pay taxes on the gains until you begin slowly withdrawing them from your next annuity. 

This rolling over process is known as the “1035 Exchange”. 

If you have a retirement plan, you also will gain the ability (at age 59 ½) to access your retirement plan funds (such as from an IRA or 401k). If you do not have a retirement plan, you can alternatively save up additional cash over that ten-year period in a savings account or CD. These savings can now be added to your new annuity. 

Now you will have a larger amount to invest into your distribution phase. 

It is at this time that you should secure your lifetime income product, although you can also opt for another short-term product if you want to continue to grow your investment, or if you plan to keep working for another few years. 

Generally, most people want to begin receiving their lifetime income when they have retired. Only you know when that time will come.

Choosing the Right Lifetime Annuity

By having your money distributed gradually from your new immediate annuity, you can spread the taxation of your gains over many years and avoid paying a higher tax rate, while also securing guaranteed lifetime income.

A lifetime income annuity offers you longevity insurance and it protects you from financial risk if you outlive your life expectancy. Having an idea of your expected life expectancy can be helpful in designing an income plan that is appropriate for your needs.

By shopping around for your lifetime income immediate annuity, you can save a substantial amount of money. 

Why Shopping Around Pays Off in the Long Run

Here is an example. A 62-year-old with a $350,000 deferred annuity set to expire decides he wants to get an immediate annuity set up to pay him monthly income for the rest of his life. 

His current provider offers him the annuity with a guaranteed monthly amount of $1512.22 along with a guaranteed minimum withdrawal benefit as an added income rider. 

The guaranteed minimum withdrawal benefit is a great feature which allows the annuity owner to withdraw a certain percentage of the principal each year until they have withdrawn the full amount. While it is a useful feature, it is not one that necessarily everyone needs. Additionally, this rider is not appropriate for someone who is trying to maximize their monthly income to last for the remainder of their life. By the insurance company adding this feature to the annuity, it may tempt the investor to withdraw funds which will ultimately decrease his monthly payout.

If the investor instead had shopped around, he or she would find another top-rated company is offering him $1,544.34 per month. Additionally, this new annuity comes with a long-term care rider. While it does not offer the guaranteed minimum withdrawal benefit, the long-term care rider was more relevant towards what the investor was looking for. 

By shopping around and getting a 1035 exchange to sign up with a new company, the investor was able to not only gain over $700 a year in the monthly income payout, but the investor now also has a long-term care rider which helps to cover the cost of long-term care.

Speak with a Licensed, Independent Financial Advisor Before You Sign

Finding out which add-ons are right for you can make all of the difference between a good annuity and a great annuity.

Speaking with an advisor and letting him or her know exactly what you want from your annuity can make a huge difference. For some, having help with medical expenses is crucial, while for others having a guaranteed minimum death benefit (a rider designed to provide a new annuitant to be named if the original investor dies).

It is a good idea not to only shop around, but to get to know the numerous add-ons, also known as annuity riders, insurance companies offer with their annuities. These riders can help to ensure that your annuity is suited to your specific requirements. By understanding what each company offers, you may find that there is a perfect product designed for you.

While riders can be beneficial, it is important to understand that they are not free add-ons. They come at a cost. That cost can often be significant and recurring. Generally, riders will decrease your monthly income payout. 

Always make sure you have a clear understanding of the annuity’s costs, terms and income payout. Speak with a licensed, independent, financial advisor who specializes in annuities.

Looking for a local, independent advisor to provide you with up-to-date personalized annuity rate comparisons from all of the top companies? Follow this link and get a call today. 

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Claude Saravia is a retirement, investment, estate planning and currency exchange writer who has been writing about personal finance for over a decade. He has worked directly with some of the largest currency exchange firms and insurance brokerages in North America, prior to switching his focus towards becoming a financial writer. Claude is a graduate of Humber College in Toronto, Canada where he studied journalism and finance. Originally from New York City, he now lives in Arizona with his wife and three dogs.

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