Just received this from Woody Alpern, who was partners with the late Mike Kavanagh at Capital Investment Advisors, Inc. (www.yourwealth.com). For more information on annuities, please contact him at [email protected] and tell him I sent you.


I was listening to your show, and I heard the last caller ask a number of questions on their annuity contract. We also agree that annuities only make sense in very rare circumstances. Happy New Year!


Woody attached about 30 pages of information on annuities, which is too long to post here in its entirety. But here is some of the information:


An annuity is a contract between you and an issuer (usually an insurance company).
In its simplest form, you pay a premium in exchange for future periodic payments to begin immediately (an immediate annuity) or at some future date (a deferred annuity) and to continue for a period that can be as long as your lifetime.*

*Guarantees are subject to the claims-paying ability of the issuing insurance company. (In other words, if the insurance company goes belly-up, your annuity could be in trouble.)

Important: Annuities are long-term tax-deferred investment vehicles intended to be used for retirement purposes. Any gains in tax-deferred investment vehicles, including annuities, are taxable as ordinary income upon withdrawal. For variable annuities, investment returns and the principal value of the available sub-account portfolios will fluctuate so that the value of the investor’s units, when redeemed, may be worth more or less than their original value.

Key Strengths

Interest and capital gains generated by an annuity accrue tax deferred until withdrawn
You can receive payments from the annuity for your entire lifetime, regardless of how long you may live*
There are normally no contribution limits
There are many different types of annuities to choose from.
You pay taxes only on the earnings portion of annuity payments
At death, proceeds from an annuity pass free from probate to your named beneficiary

Key Tradeoffs

Annuities carry fees and expenses
May have surrender charges
Contributions are not tax deductible
There may be tax penalties for early withdrawals prior to age 59 1/2
Once you elect a specific distribution plan, annuitize the annuity, and begin receiving payments, that election is usually irrevocable (with some exceptions)


Fixed annuity contracts offer compound growth without anxiety about fluctuations in the stock market
Income taxes are deferred
Interest rates are generally competitive
Proceeds paid to a named beneficiary are exempt from probate
Proceeds may also be exempt from state inheritance taxes
You may have the right to take 10 percent (or more) of the account value annually without paying surrender charges (but you are subject to the IRS penalty on withdrawals made before age 59 1/2)
If the owner has a medical need for long-term care in a nursing home, tax-deferred earnings may be withdrawn, subject to state laws
Switching to another company can be done without incurring any income tax liability (see Section 1035 of the Internal Revenue Code)
Values may be transferred from a life insurance contract to a tax-deferred annuity through a Section 1035 exchange
You may turn the accumulated account value into a stream of income that you cannot outlive, though the amount you receive may be higher using other payout options
You may take withdrawals at some future date when your personal income tax bracket may be lower than it is during your peak earning years (subject to penalty and surrender charges) Depending on your state, account values may be protected from creditors


The tax-deferred growth will ultimately be taxed, perhaps to a beneficiary in a higher income tax bracket
There is no step-up in basis at death, and capital gains tax rates are not applicable, so all income is taxed as ordinary income
Due to possible deferred sales charges and IRS tax penalties for early withdrawal, the annuity is not considered a liquid asset
Ownership by a corporation or any other “non-person” subjects the growth to annual income taxes
Some deferred sales charges may last for many years
Some contracts offer a higher rate of interest if you annuitize and a lower rate if you surrender the contract
In some states, state premium taxes may reduce the amount of value available for future payments
Annuities are not federally insured

Jan. 4, 2009