Entrepreneur Tips

Buying an Annuity ― Are Annuities Safe? Who Needs One?

Buying an Annuity – What You Need to Know

what is an annuity

Imagine a scenario where Martha has saved $500K for her retirement.

Martha puts her $500K into the stock market. The stock market crashes like it did in 2008 and like it has many times before.

After the crash Martha has almost nothing to live on, even though she spent her whole life saving and getting ready for her retirement.

Now imagine scenario two, with Martha’s twin sister Margie.

buy an annuity

Margie also saved $500K for retirement. Margie put her money in a good, carefully picked fixed-indexed annuity plan and the stock market crashes. Her $500K stays completely intact and she is able to live happily off her retirement money unlike her poor sister Martha.

In this scenario, Martha moves in with Margie and Margie ends up supporting them both with her money from her fixed-indexed annuity that was unaffected by the stock market crash.

Moral of the story is to either put your money in an investment with zero-downside, or have a nice twin sister like Margie who is willing to support you in your old age.

What is an Annuity?

Annuities are backed by the government laws and insurance companies to protect those who depend on life insurance companies for life insurance and annuity payouts, which are often their main form of living income in the case of widows or retires.

Picking the right plan is the most important part of getting a good annuity since many plans either have very limited upside, aren’t back by the state GA, or eat away at your principle.

Even when an insurance company has individually gone bankrupt, it has state backing to get it running again and to back its policies, although you should always pick an insurance company that has a strong rating and long track record to protect your annuity investment as much as possible.

This is because when an individual insurance company goes bankrupt or fails, the Insurance Guarantee Association (GA) in that state uses fees collected from all Insurance Agencies in that state to guarantee policies up to the state limits, usually around $100K to $250K for annuities.

You have to make sure your specific annuity is covered under its state’s Guarantee Association to make sure your policy has protection, as not all plans are covered.

Are Annuities Safe?

Annuities with grade A insurance companies with long, positive track records that are backed by their state GA association are one of the safest types of investments, even when compared to traditional banks, which most people don’t bat an eye putting money into.

Insurance companies are the only type of company that can give out annuity policies get their safety from careful government regulation. Annuity companies don’t leverage over 90% of their money in risky investments as banks do.

This makes putting money with insurance companies in an annuity safer than keeping your money in a bank, which likely has almost all of your money in high-risk investments and is in high likelihood of losing it all in any crash. Many people don’t realize how leveraged and risky keeping their money in a bank is.

Any bankrupt insurance company also goes through rehabilitation with the state, giving it another chance with the state insurance commission’s help to it back on its feet, something not done with banks or other financial institutions.

Instead of going out of business, the majority of the time, other insurance companies will buy the policies and keep them going, so it is rare for any insurance company to completely go out of business and stop paying its policies.

Ben Franklin, one of America’s founders with great foresight, was also an annuity proponent, advocating for widows and orphans to get insurance annuity streams of payment so they would have a safe income stream to live on.

Fixed Indexed Annuity

There are different annuity types:

Fixed

Variable

Fixed-Indexed

Immediate

Deferred

Each type has its positives and negatives, and you can do more research to figure out the type that makes the most sense for your specific situation.

I prefer fixed indexed annuities and will briefly go over their benefits here:

A fixed-indexed annuity is a tax-deferred way to put money for long-term growth. A fixed indexed annuity often has more potential to grow than a fixed annuity, and it has less risk along with a lower potential return than you’d get if you went with a variable annuity.

A fixed-indexed annuity’s performance will often mirror a specific index such as the S&P 500 Composite Stock Price Index, which is a bundle of 500 stocks that allow investments to be diversified in various companies while representing the market.

Your money follows the market in a fixed-indexed annuity, but it is not exposed to the risk of being directly in the stock market.

When you choose the right fixed-indexed annuity plan, your money, including your principle and money earned, will never go down, even if the market happens to dip or even completely crash.

This makes the right annuity plan a safe and risk free place to put your money and allow it to grow.

Why Get an Annuity?

One of the main reasons to get an annuity is so your money will still be able to grow in the market but also be protected from crashes and downturns when you choose the right plan.

An example of why this can be beneficial is many people near the age of retirement had their money in the stock market in 2007 and lost everything or almost everything in the 2008 crash. Those with their money in the right type of annuities didn’t lose anything.

That goes to show how important it is to put your money in a risk-free environment if you are depending on having your retirement to live on in the near future.

There are two main types of people who can benefit from annuities. However if you are extremely risk-averse, you may benefit from putting your money into an annuity instead of or in addition to a into a traditional bank or stock market investments so you can grow your money more than it sitting in a low-interest CD and without the risk of stock market crashes and bumps.

You also want to make sure you get an annuity that doesn’t eat into the principle and that what it gives you is more than what you are paying. You need to pick a good plan and read the fine print so you’re not ripped off.

  1. Retirement Annuity

    If you put your annuity in a retirement account, it is important to note you cannot withdraw that money without paying a penalty unless you wait until your plan’s / government rules’ retirement age to draw it out.

    You are nearing retirement and want to keep your money safe:

    If you are nearing retirement age and want to make sure the money already in your retirement accounts won’t be wiped out with a market dip, certain types of fixed indexed annuities guaranteed not to go down can give you peace of mind as well as guaranteed payouts without risk of losing your hard earned savings or having nothing to live on in retirement.

  2. Small Business Pension Plan Annuity

    You own a business and want to save money on taxes and fund your future self’s retirement.

    I am in my late 20’s and own a business. I use a fixed indexed annuity with guaranteed zero downturn and one that mirrors 50% of market gains. For me, I enjoy the peace of mind knowing my retirement nest egg won’t go down with market downturns, and knowing I’m getting gains alongside the market without the accompanying risk.

    Knowing I will have a significant nest egg for retirement also gives me peace of mind as a small business owner and entrepreneur.

    Finally, I love lowering my tax bracket and saving tax money while benefitting my future self.

    Many entrepreneurs don’t consider annuities or business pension plans, but that may be because they are not even aware these exist, just like I was unaware of them existing before I asked my accountant other ways I could save for retirement and slash my tax bill.

    I was lucky to have a good accountant who knew about business pension plans and annuities, but if your accountant is less knowledgable, at least you had the foresight to google this page and learn about potential tax saving and retirement annuity benefits for entrepreneurs on your own.

Business Pension Plan Annuity

Annuities are usually for people close to retirement so they can limit their risk but still make money on their investments and get guaranteed payouts – all dependent on their specific insurance company contract of course.

I am relatively young and got into annuities because my parents are planning for retirement and introduced me to them. They intrigued me right away because of their guarantee to never go down but still get market upside in the best fixed indexed annuity plans.

I also own my own business and was looking for a way to set aside more money tax-free that I’d pay tax on later in life at lower income brackets when I choose to withdraw it, as well as finance my retirement earlier.

My accountant introduced me to the concept of a business pension plan, where have the option to put a much larger chunk of money away than available in a traditional IRA or SEP plan, in an annuity to guarantee it will never go down but it still gets to grow at half market rate uncapped.

I loved this idea for the huge tax benefits and ability to put away money to save in an essentially risk-free growth vehicle for my future self in retirement.

Many younger people don’t consider annuities because they think they have time to let their money weather stock market ups and downs and still come out ahead, but I don’t think it makes sense to gamble as much with my retirement savings. That’s why I love the idea of a business pension plan diversified with some annuities for myself and for anyone who is an entrepreneur making more than what you can easily max out with your IRA or SEP.

I also love the idea for those closer to retirement who want to keep their money safe from a sudden market crash.

How to Get an Annuity

You can contact various life insurance agencies in your area to get an idea of their annuity plans as well as research online to find plans that are a fit for you.

If you have questions or want help picking out an annuity that is right for you feel free to email me stacycaprio@gmail.com. I personally read and respond to every email and love hearing reader thoughts.

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