Annuities Unveiled: The Secret Weapon for Wealthy Investors

Patrick Devaney |

Annuities are investment strategies offered by insurance companies that provide a steady income stream in retirement. These financial vehicles may particularly appeal to high-net-worth (HNW) investors for various reasons.


At their core, annuities are a contract between an investor and an insurer. The investor commits an upfront amount (the premium) to the insurer, who, in turn, promises to repay the premium plus earnings over a specified period. This negotiated timeframe could range from immediate payouts upon purchase to deferred payments later. Based on the timeframe, an annuity can be either immediate or deferred. Here is the first point HNW investors must consider—the timeline of when they will take distributions.


Annuity distribution options


Immediate distributions


Immediate annuities can provide income immediately, which may be appropriate for someone who has already retired and wants to supplement their retirement income.


Deferred distributions


Deferred annuities, which grow tax-deferred until distributions start, can be a strategy for HNW individuals aiming to manage their taxable income and work toward long-term growth.


Types of annuities


Fixed annuities


Fixed annuities provide a guaranteed rate of return irrespective of market performance, thereby offering stability during market volatility. Fixed annuities are often considered less risk-averse but produce lower returns over time.


Variable annuities


Variable annuities' earnings depend on the performance of underlying investment strategies such as stocks or bonds. While variable annuities offer the potential for higher returns, they may come with increased risk.


Fixed-Indexed annuities


Fixed-indexed annuities tie performance to a market index like the S&P 500 and provide a minimum guaranteed rate of return and cap gains. This strategy helps mitigate risk while allowing some market exposure. Fixed-indexed annuities balance a fixed annuities' guaranteed rate and a variable annuities' growth potential, making them appropriate for some HNW investors.


What HNW Investors must consider


Annuities do have potential drawbacks. The significant investment required could tie up capital and limit the investor's liquidity. Annuities can also come with complex fees, surrender charges, and possible tax penalties on early withdrawals. Plus, the returns on fixed annuities may need to catch up with inflation. Another risk is the performance of the index account; a loss of investment or accumulation may occur.


However, annuities may be suitable strategies for HNW investors because they offer the insured lifetime income, beneficial tax treatment, and potential death benefits. Particularly in volatile markets, the guaranteed income from annuities can provide financial confidence.


Whether an annuity is appropriate for an investor depends on their goals, risk tolerance, time horizon, and tax situation. It's vital for HNW investors considering annuities to engage with their financial and tax professionals, who can evaluate all these factors and provide personalized guidance.


It's also vital that HNW investors consider different annuities from different insurance companies. Each annuity product type can vary, making it essential to conduct due diligence before purchasing an annuity. Examine each annuity provider, product structure, annuity type, potential benefits, and drawbacks.


For HNW individuals, annuities may offer a reliable income stream, tax advantages, and financial confidence. However, their complexity mandates careful deliberation and education before purchasing one and adding it to a retirement income portfolio.







Important Disclosures:


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.


Investing involves risks including possible loss of principal.


Fixed and Variable annuities are suitable for long-term investing, such as retirement investing.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.  Variable annuities are subject to market risk and may lose value. 


Fixed Indexed Annuities (FIA) are not suitable for all investors. FIAs permit investors to participate in only a stated percentage of an increase in an index (participation rate) and may impose a maximum annual account value percentage increase. FIAs typically do not allow for participation in dividends accumulated on the securities represented by the index. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Withdrawals prior to 59 ½ may result in an IRS penalty, and surrender charges may apply. Guarantees are based on the claims-paying ability of the issuing insurance company.​


All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.


This article was prepared by Fresh Finance.

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