Non-Qualified Annuity


The difference between a non-qualified annuity and a qualified annuity is its tax treatment. This is a fundamental difference that you must speak with your life insurance advisor or your accountant about to make sure you use the right source of money to buy your annuity. You will see how a non-qualified annuity has a tax advantage over the qualified annuity.


A Non-Qualified Annuity is Purchased with After Tax Dollars

non qualified annuity

non qualified annuity

Put in simple terms, the non-qualified annuity contract is bought with a cheque coming from your bank account. This is why we use the term “non-qualified” as it is not qualified as an annuity bought from a registered account (pension). It may sounds counter intuitive, but non-qualified annuities show a strong tax advantage not only compared to qualified annuities but also compared to most investment vehicles.


What is the Tax Advantage of a Non-qualified Annuity?


Since your annuity contract has been purchased with after tax dollars, your taxable rate on the annuity payment will also be reduced. When calculating the applicable tax on an annuity payment, the contract stipulates that a part of that payment is in fact a return of capital.


In other words; non-qualified annuities reimburse you, with each annuity payment, a part of your (after tax) capital that was used to purchase the contract.


Obviously return of capital is not taxable as you already paid your dues on this money. You can’t really calculate what part of the annuity payment will be taxable as an investment return and the part that will qualified under return of capital. However, your life insurance advisor will be able to demonstrate it in the non-qualified annuity contract.


Non-qualified Annuity Tax Treatment Example

non qualified annuity tax treatment

non qualified annuity tax treatment

Let’s presume you have $100,000 in non-registered investments. You decide to deposit the money in your bank account and buy a non-qualified annuity with the proceeds. The contract pays an 8% return. This means you receive $8,000 annually. Remember, the $8,000 is not fully taxable as you purchased a non-qualified annuity.


The insurance company calculation (mainly based on life expectancy statistics) shows a portion of return in capital of $5,000. This means the Government agrees that you receive the first $5,000 from your non-qualified annuity tax free. The remaining ($8,000 – $5,000 = $3,000) will be taxed according to your marginal tax rate. If you are taxed at 30%, this means $900 in taxes ($3,000 * 30%). Therefore, you pay a total of $900 on a $8,000 non-qualified annuity payment. That’s the equivalent of an 11.25% tax rate.


If you had purchased your annuity through your registered fund (in a tax sheltered account), your contract would have been considered as a qualified annuity. In this situation, the full $8,000 would have been taxable. Instead of paying $900 in tax as is the case with a non-qualified contract, the qualified annuity tax payable would be $2,400 ($8,000 * 30%).


Therefore, if you have investments in both non-registered and registered accounts, using your after tax dollars to buy a non-qualified annuity is definitely the best solution tax wise. As you will pay tax upon withdrawals from your registered investments, you might want to postpone tax payable on your non-registered investments.


Non-qualified Annuity Investment Strategy


There is a very interesting investment strategy to be realized with a non-qualified annuity. If you join the annuity contract with a life insurance, you can protect both your pension income and your estate. In fact, if you purchase a non-qualified annuity and die two years later, your annuity payments will be lost.


However, if you buy life insurance for the same amount, your heirs will receive the capital you used to generate your pension. It’s like enjoying the investment return of your money while you live and giving your capital to your heirs once you don’t need it.


The non-qualified annuity payments are not fully taxed and the proceeds of a life insurance is 100% tax free. This makes this strategy very interesting in terms of both retirement and estate planning.  You can find more information on this strategy, also called the back-to-back annuity, here.


Where Can I Buy a Non-qualified Annuity?


Non-qualified annuities are sold by life insurance agents and directly from a life insurance company. You can contact a trusted life insurance agent by clicking here. He will walk you through all type of annuities and will help you chose what is best for you.


Non-qualified Annuity Video Explanation


While searching the web, we found this lengthy, but complete, explanation of a non-qualified annuity and its tax treatment.

Nationwide Annuities


Nationwide is one of the largest insurance and financial services providing companies in the world. It has a successful record of providing domestic property and casualty insurance, life insurance and retirement savings, asset management and strategic investments.


nationwide annuities


Nationwide Annuities Company Profile

Over the last 80 years, Nationwide has grown from a small mutual auto insurer owned by policyholders to one of the largest insurance and financial services companies in the world, with more than $135 billion in statutory assets.

Its journey begin in 1925 when The Ohio Farm Bureau Federation incorporates the Farm Bureau Mutual Automobile Insurance Company with the goal of providing quality auto insurance at low rates for farmers in Ohio. They sell their first policy in 1926.  In 1955 they’ve changed their name to Nationwide Insurance®.

In 1978 Nationwide Insurance® moved to their international headquarter in central Ohio. Nationwide Financial® and Nationwide Bank opens to public in 1997 an in 2007 respectively.


Nationwide Products

Nationwide Insurance® offers a wide range of life insurance, retirement plans, mutual funds and other financial services. Its product list contains Life Insurances: Variable, Universal, Term & Whole;  Business Life Insurance: Variable Universal Life & Universal Life; Annuities: Variable, Fixed, Fixed Indexed & Immediate Fixed.


Final Thoughts on Nationwide

Since an annuity product adapted to members’ needs allows members to benefit fully from the accumulated amounts throughout their lifetime, it is important to choose the right product from the right company. According to the result of a detail research, Nationwide is a very large and well reputed world class company. All of their products are trusted and if you chose a Nationwide Annuity product you will definitely be benefited at the end of the day.



New York Life Annuities

New York Life Insurance Company is a leading insurance and other financial service provider of United States. Since 1845 New York Life Insurance Company helping their customers to create, protect and preserve their financial security. They offer various types of life insurances, Long term care insurance, mutual funds and investment annuities.

new york life annuities


New York Life Annuities Company Profile

New York Life Insurance Company has been providing their service for more than 165 years. The company is founded on April 12, 1865. They sell their first policy in the same year. The first Elected Secretary Lewis Benton purchased the first policy for $ 5,000.


New York Life Products

New York Life Insurance Company is a leading insurance and financial service provider in United States. They offer a wide range of services. Their product list includes, Life Insurance: Term Life Insurance, Whole Life Insurance, Universal Life Insurance, Variable Universal Life and Corporate Sponsored Plans; Annuity: Deferred Annuity, Fixed Deferred Annuity, Variable Deferred Annuity; Retirement Income: Guaranteed Lifetime Income, Guaranteed Future Income Annuity; Long Term Care Insurance and Mutual Funds.


New York Life Awards

New York Life Insurance Company is a well reputed institution. They have been awarded a number of occasions for their excellent performance in various section of their business. Some of the recognitions of their successful journey are:

  • Fortune magazine’s list of World’s Most Admired Companies is the definitive report card on corporate reputation. For 2013, 16 companies are ranked in the Life and Health sector and New York Life ranked fourth overall
  • New York Life ranks #89 on the prestigious Fortune 500 list
  • New York Life has been named a “Best Company for Multicultural Women” by Working Mother magazine.
  • New York Life was selected for the 2012 Working Mother 100 Best Companies based on an extensive application with more than 500 questions on workforce representation, child care, flexibility programs, leave policies and more.
  • New York Life has been named one of DiversityInc’s “Top 50 Companies for Diversity” for 2013, ranking 30th on list.


Final Thoughts on New York Life

Since an annuity product adapted to members’ needs allows members to benefit fully from the accumulated amounts throughout their lifetime, it is important to choose the right product from the right company. According to the result of a detail research, New York Life Insurance Company is a very large and well reputed world class company. All of their products are trusted and if you chose a New York Annuity product you will definitely be benefited at the end of the day.




Jackson Annuities


Jackson National Life Insurance Company® (“Jackson®“) is a leading provider of retirement solutions.  It has a long and successful track record of providing advisers with the product, tools and support they need to design effective retirement solution for their clients. Jackson also provides asset management and retail brokerage services through its subsidiaries and affiliates. Jackson annuities are among the most complete annuity product offering across the United States.


jackson annuities


Jackson Annuities Company Profile

Jackson National Life Insurance Company® (“Jackson®“) is a family-owned company that has evolved into a diversified retirement service provider. This company is named after Andrew Jackson, the seventh president of United States. Jackson started its journey in 1961 and sells their first policy in the same year. Since 1995, Jackson has broadened its product line up by including various types of annuity products. In 2010, Jackson’s International Financial Reporting Standards (IFRS) asset exceeds and in 2011 Jackson achieves record sales and deposits of $22.9 billion and record IFRS net income of $683 million. By acquiring Reassure America Life Insurance Company in 2012 Jackson incease its policy count to more than 4 million.


Jackson Products

Jackson is a pioneer in retirement solution providing industry. Jackson offers a wide range of retirement policies, asset management and retail brokerage services. It also offers variable, fixed and fixed index annuities in all US states except New York. Variable and fixed annuities are available for purchase in New York through Jackson of NY. Jackson designed two primary distribution outlets: Jackson National Life Distributors LLC and the Institutional Products department to wholesale and distribute their products to independent and regional agents and to institutional investors respectively.


Jackson Annuities

Jackson annuity product offering is quite diversified. They also offer several side benefits such as:

#1 Competitive Interest Rate – Jackson annuities are among the best annuity rates

#2 Range of Income Options – Jackson annuities offers life or term certain fixed annuities to meet your retirement needs.

#3 Death Benefit Protection – Jackson annuities can be protected against premature death of the annuity client.


You can pretty much find everything you need within Jackson annuity portfolio. They also offer a great annuity resource page on their website and explains who should consider annuities.


Jackson Awards

Jackson National Life Insurance Company® (“Jackson®“) has an award-winning team. The company has been recognized for its wholesaling, customer service, marketing, workplace culture and community support. They have received World Class Customer Satisfaction award from Service Quality Measurement Group, Highest Customer Satisfaction in the Financial Sector award from Service Quality Measurement Group, APEX awards, Grand Award: Electronic Media, Awards of Excellence: Product & Software Manuals, Awards of Excellence: Brochure – Educational, Awards of Excellence: Non-product Kits, Best of Show: Single Item, Sales/Marketing/Branding Promotion Total Budget Less Than $10,000, Awards of Excellence: External Corporate Print Communications, Gold Monitor award for Public Homepage & Navigation and many other awards as well.


Final Thoughts on Jackson Annuities

Since an annuity product adapted to members’ needs allows members to benefit fully from the accumulated amounts throughout their lifetime, it is important to choose the right product from the right company. According to the result of a detail research, Jackson is a very large and well reputed world class company. All of their products are trusted and if you chose a Jackson Annuity product you will definitely be benefited at the end of the day.



Hartford Annuities


The Hartford Financial Services is a world class company and widely recognized for its service excellence, sustainability, trust and integrity. This is a leading company in insurance sector providing property and casualty insurance, group benefits and mutual funds.


Hartford annuities


Hartford Annuities Company Profile

The Hartford Group has more than 200 years of expertise. It is a multifaceted company organized to fulfill customer’s demand. By anticipating customer’s needs and providing a competitive financial product they financially secure their customers future. Its stock is also listed in New York Stock Exchange under the ticker symbol HIG.

The field of operation of The Hartford is not limited in insurance and investment sector. They also support one of the world’s most exciting and inspiring sporting event, The Paralympics.

The Hartford’s multimedia advertising campaign reach millions of customers worldwide. They also support critical business activities during natural and man-made disasters.


Hartford Products

The Hartford Financial Services offers a wide range of life insurances, retirement plans and IRAs: variable Universal life insurance, Universal life insurance, Indexed universal life insurance, term life insurance, Retirement plans for individuals, small business and employer-sponsored retirement plans. In regards to annuity they used to offer three types of annuities: Variable, Fixed and Fixed Index annuity. They also offer mutual funds and college savings.


Hartford Annuities

New Hartford annuities products are discontinued as of April 2013. The company has decided to stop offering annuity products as a business decision. Existing Hartford annuities will continue to exist and Hartford will continue to assist any annuity clients and contract holders. Therefore, the only way to purchase an Hartford annuity will be through the secondary market annuities.


Final Thoughts on Hartford

Since an annuity product adapted to members’ needs allows members to benefit fully from the accumulated amounts throughout their lifetime, it is important to choose the right product from the right company. According to the result of a detail research, Hartford is a very large and well reputed world class company. All of their products are trusted and if you chose a Hartford Annuity product you will definitely be benefited at the end of the day.

5 Points to Consider Prior to Buy an Annuity



If you are about to retire and you are looking for an additional income stream to support your life style, buying an annuity might be the best thing for you. However, annuities are more complex than most financial products. This is why it is so important to understand fully how the annuity works before entering in such contract.


In order to help you making your decision, we have highlighted the top 5 point to consider prior to buy an annuity:


#1 Don’t Invest if You Don’t Understand


Most annuity contracts show several pages of complex financial terms and it’s not always easy to navigate through this language when you are not familiar with it. An annuity contract can include several clauses that will enable the contract to become more flexible according to your need. This also means you will require additional information to understand it.


As a reference, you can check out our Annuities Explained section where you will find answers too many questions. Reading and doing further researches is your best ally to fully understand how annuities work. The information is there, it’s only a matter of taking the time to read it.


#2 Maybe You Need More than One Annuity


Depending on the structure of your financial plan, you may request different level of income stream at retirement. This may include that you will buy various annuities to meet your need instead of going for a simple life annuity. For example, you may want an annuity that will pay X amount per month while both your spouse and yourself are alive. In the event of one of you passes away, you may require a smaller amount of monthly payments.


You can build your custom annuity plan with a combination of deferred and immediate annuities. Before you make any purchase, take the time to define your need and plan how you can meet them with a “package” of annuities.


#3 The Devil is in the Details – Beware of the Costs


There is no free lunch in finance. Remember that line before you sign up for any financial products. When it’s too good to be true, it is because it is too good to be true! Annuities are no exception. It is wonderful to expect a monthly payment for the rest of your life, but this contract incurs costs as well.


We all expect the insurance company making a few dollars out of the contract. After all, we all need to pay for our bread and butter, right? But it doesn’t mean you need to be ripped by your life insurance agent who sells the annuity contract. Ask about the annual costs, fees and management expenses you might pay. This is definitely something to highlight with deferred variable annuities since they are linked to an investment in the stock market.


#4 Survivor Annuities are Best Value


If you purchase a life annuity based on your life alone, everything is gone once you pass away. This may complicate things for your surviving spouse… especially if you die at 65 and your spouse goes up to 90!


The survivorship option is often overlooked by investors while it should probably be the very first thing to look at.


#5 Don’t Put All Your Eggs in the Same Basket


When investors start learning about annuities, a part of them want to cash all their investments and buy a huge contract right away. They think there is nothing better than receiving a guaranteed pension for the rest of their life.


But what if you want to buy a new car, a boat or go on vacation?

What if you want to make money gifts to your heirs while you are live?

What if you need an extra $20,000 per year for medical support?


If you have frozen all your assets into an annuity, you will not be able to recuperate your money to receive a lump sum payment. Once the contract is bought, you are set to receive an amount each month but you won’t be able to withdraw $50,000 in one shot.


The liquidity of an annuity is not to be neglected.


You Don’t Have Questions? Think Again!


Buying an annuity could be the best or the worst financial move you will ever do. For some investors, it is the best product around as it ensures a pension for life. But it doesn’t mean that everybody should buy an annuity. If you don’t have any questions and you are ready to buy your contract, think again. Take the time to think about everything that could happen in your life and see if the annuity still stands.


Top 27 Annuity Articles from Non-Biased Sources

Annuities are not always easy to understand. The problem is that you main source of information might be your financial adviser… who will eventually make money if he sells you one. Therefore, it’s pretty hard to get a non-biased opinion on whether or not you should purchase an annuity.


I’ve searched the web for several hours and read over 100 articles about annuities. I’ve published the top 27 articles about annuities from non-biased sources. I’ll be updating this list if any good article comes to my attention so don’t hesitate to contact me and provide me with more interesting articles!

top 27 annuity articles

Annuity Calculators


How to Calculate the Present Value of an Annuity @ Financial Mentor (US)

This is a simple and easy to use calculator to understand how annuities work. You can understand how much yield the Life Insurance Company is giving you for your money.


Level Vs Index-Linked Annuity Calculator @ Candid Money (UK)

This calculator helps you making the difference in payments from a level and index-linked annuity.


Calculating the Value of An Annuity in Excel @ Experiments in Finance (US)

If you are comfortable with Excel, this tutorial shows you how to build your own annuity calculator.


Annuities Explained


Personal Finance 101: How Does an Annuity Work? @ Simple Dollar (US)

Trent is concerned about guarantees offer by the Life Insurance Company in regards to your annuity if the organization experience financial problems. Please note that part of your annuity may be insured by the Government. You must contact your adviser to find out if your contract is insured as laws vary from countries to countries.


10 Things Seniors Need To Know About Purchasing Annuities But Don’t! @ Saving Advice (US)

This is definitely a good article to start your research about annuities. This covers major pitfalls to avoid prior to purchase an annuity contract.


Is a Reverse Mortgage Annuity a Good Deal? @ Wealth Pilgrim (US)

Reverse mortgage annuities are using your property value as a payment (similar to taking a mortgage on your house to cash its equity) and provide you with an annuity. This product has been made for retirees who wish to keep their house but look for an additional source of income.


How To Earn Income For The Rest of Your Life: The Good, Bad and Ugly of Annuities @ Gen X Finance (US)

You can find additional info on fees and riders in this article. Annuities are definitely the cheapest product in the financial industry.


Fixed Annuities: Maximize State Guaranty Coverage Limits @ My Money Blog (US)

If you are concerned about guaranty coverage on your annuity, this article will explain you how to maximize your guaranteed and sleep well at night.


Is an Annuity The Worst Investment a Young Person Can Make? @ Good Financial Cents (US)

This is an interesting take on annuities for younger people. Most articles about annuities are written for seniors, this one explain if younger investors should look at this product as well.


Secondary Market Annuities: A Low-Risk Way To Earn Great Rates? @ Oblivious Investor

Mike explains how you can purchase secondary market annuities and the premium its gives compared to Government bonds. Depending on individuals, it could be a good investment or not.


Some Common Questions About Annuities @ Million Dollar Journey (Canadian)

This blog highlight several questions about annuities with plain and simple answer. This is definitely a great place to start your research.


How Annuities Can Help You Fight Groundhog Day @ My Own Advisor (Canadian)

Mark found an independent financial planner to write a detailed example of how annuity works with calculations.


5 Reasons To Include Annuities In Your Estate Planning @ Financial Samurai (US)

Sam provides an explanation of 5 major advantages of including annuities in your estate plan. Annuities are definitely a powerful financial product to use.


Level Vs Escalating Annuities @ Monevator (UK)

This is well explained article to highlight the difference between a level annuity (equal payments) and escalating annuities (also called indexed annuities where payments increase to protect your lifestyle from inflation).


Deferred Fixed Annuity: A Good Idea For Retirement? @ Money Ning (US)

This article is about deferred annuities with some mentions about pitfalls such as the teaser rate offer on the first year of the annuity contract to attract investors looking for yield.


Annuities Explained @ Magical Penny (UK)

Some crucial info about how annuities work along with their pros and common pitfalls.


3 Risks To Consider Before Investing in Fixed Annuities @ My Personal Finance Journey (US)

Jacob talks about how inflation, interest rate and low liquidity risks could affect your choice of purchasing a fixed annuity.


Understanding the Ins and Outs of Selling Structured Settlement Payments @ 20’s Finance (US)

Annuities are a structured settlement product. This article explains how the contract works between each party.


How To Use Variable Annuities The Right Way @ Amateur Asset Allocator (US)

For most investors, variable annuities are poor solutions because of their high management fees. However, there is a way to use variable annuities for your own good.


If You Could Buy a Gold-Plated Government Pension, Would You? @ Money Smarts Blog (Canadian)

A critic looks at annuities and its main flaws; it doesn’t leave any money for heirs in most cases.


Index Annuity Traps: The Truth About Equity-Indexed Annuities @ The Digerati Life

Equity-indexed annuities are far from being cheap and their investment return is capped. This article points all the major flaws of this product.


Could an Annuity Be The Ticket To Reliable Retirement Income? @ Smart on Money (US)

Peter does a good job listing four things to consider prior to purchase an annuity.


Annuities: If You Aren’t Getting 2.5% on Your Investments @ The Chicago Financial Planner (US)

Roger, a financial planner, rises some red flag questions to ask your adviser if you consider buying an annuity.


What is an Annuity? @ Investor Junkie (US)

Sometimes, straight to the point articles are the best source of information. If you don’t want to waste too much time understanding annuities, this article is for you.


Is Variable Annuity Tax Deferral Worth Paying For Again? @ Nerd’s Eye View (US)

This is an article about the true worth of tax deferment characteristics attached to variable annuities.


Adding an Annuity to Your Retirement Plan @ One Smart Dollar (US)

This article discuss how annuities can be use within your retirement plan to assure a basic level of income stream.


Personal Experience with Annuities


Should Annuities be Part of Your Retirement Plan? @ Retire by 40 (US)

Joe is taking his own personal situation to analyse if an annuity is worth it for him or not. It appears that he is a little bit too young to purchase an immediate annuity and prefer the flexibility and higher potential return from his dividend portfolio.

Joint Life Annuities



From this day until the moment of our death…


Life annuities are generally a good product for an investor who is risk averse and doesn’t want to manage his portfolio. The annuity provides a steady income stream until the investor (also called the beneficiary) pass away. At this moment, depending on the type of contract, there may or may not be a remaining balances to be switched to the investor estate.


If you retire with your spouse, the perspective of losing a part of your money given to a life insurance company is definitely not appealing. What will happen to the surviving spouse? Will he/she be left with no revenues?

 joint life annuities

Joint Life Annuities


Life insurance companies are apparently very creative and try to meet every investors needs. A simple life annuity contract doesn’t cover for both spouses in the event of death of the beneficiary. In order to assure an income stream to both spouses, life insurance companies came up with a joint life annuity.


How the Joint Life Annuity Works


A regular life annuity stops at the investor death. Therefore, there are payments starting at the agreed date on the contract until the beneficiary passes away. The joint life annuity simply has two beneficiaries instead of one; the investor and his/her spouse.  Therefore, it enables payments to be made until the death of the second beneficiary.


Payments start according to the contract and it is made in the name of one or both beneficiary. Upon the death of the first beneficiary, the annuity continues its payment to the second person on the contract. The monthly payment is the same before or after the death of the first beneficiary since it’s a joint contract. It is the perfect solution for an aging couple seeking for a secure source of revenues for both parties.


Joint Life Annuity Cost


As any other annuity contracts, joint life annuities cost is on a case by case basis. Depending on your age, your health and the amount invested, the payment will vary. The joint life annuity is obviously more expensive than a standard life annuity contract. The reason being the payments must not last during the life of a single investor but during the last of two investors. This increase significantly the life expectancy of the contract as it will only ends once both beneficiaries are deceased.


Joint Life Annuity Advantage


The main advantage compared to a stand life annuity contract is the possibility to cover two investors with the same contract with the same terms. It is usually cheaper (e.g. you will receive more money from your annuity) than purchasing two individual policies.


Joint Life Annuity Disadvantage


Joint life annuities might not be a good product for couples who have different income stream needs. If one spouse already benefit from an important pension plan, there may no need to add retirement income through an annuity. In this situation, the spouse without the pension plan is maybe better off with a single life annuity that will finish upon his death.


How Do I Know If I Should Go For a Joint or Single Life Annuity?


Finding the best contract and annuity rates is often a numbers game. You need to meet with an adviser that will run multiple scenarios and offer you the best value for your money. If you haven’t found an adviser yet, you can click on the following link to contact a trusted representative that will answer all your questions:


Who Sells Annuities

What is an Annuity?



When we arrive at retirement, we all wish we could simply receive a monthly pay check and keep-up with our hobbies. Imagine a retirement without stress; imagine receiving a constant income stream for the rest of your life. Put it simply, this is what an annuity is.


What is an Annuity?

 what is an annuity

An annuity is a contract offered by Life Insurance Companies. In exchange of a lump sum of money provided by the investor, the Life Insurance Company guarantees a steady income stream usually paid monthly. In other words; the investor gives the Life Insurance Company his money in return to get a secured pension payment. You can look at the following video for an example:


Annuities Explained


Unfortunately, annuities could be far more complicated than this video. There are several types of annuities and their characteristics vary greatly from one product to another. This is not to mention the annuity cost where rates of return also depend on several factors.


This section has been built after receiving many questions from our newsletter subscribers. You can browse through the different article titles to find what you are looking for. You will find detailed answers to all your questions along with a straightforward point of view on annuities. If you are not already a subscriber, add your name and email address below and you will receive our free guide to annuity on top of receiving additional information about annuities:

Start Your Research Through Those Articles


You can click on any of those articles covering several aspect of annuities.


Is an Annuity Right for You?

Annuities Pros & Cons

Are Annuities Safe?

Annuity Death Benefits Explained

Annuity Pitfall and How to Avoid Them

10 Questions about Annuities (and their Answers!)

Annuities and Estate Planning

Annuity Unique Features

What an Annuity Contract Look Like

How to Structure Your Annuity

Annuities Myths & Realities

Annuities and Retirement

Who Can Sell Annuities?

Are Annuities Scam? 6 Flaws of Annuities You Must Read About


Are annuities scam? Do you think Life Insurance Companies invented this complex financial product to take your money and run? I don’t think there is a need to become paranoiac about annuities, they are not a scam. However, it doesn’t mean that annuities don’t have flaws.


#1 You Already Bought an Annuity and You Don’t Even Know


annuities scam

If you believe everybody should buy an annuity, you’ll be happy to know that we all have one. When you think about it, if you have ever worked, you have contributed to Social Security. This “Government pension plan” is nothing but a deferred group annuity. As long as you live as a retiree, you will receive Social Security payments. Unfortunately, those payments are not enough to cover for your yearly drip at the beach and pay for nice restaurants. Let just say it’s not the best annuity you could have bought. You will most likely need to purchase another annuity contract if you want to cover your additional expenses. On the other side, if annuities would be a scam, Government wouldn’t buy one for you.

#2 Forget About Your Money


This is probably the point where most people forget when they purchase an annuity; once you buy an annuity, you “lose” your money. You didn’t get scammed; you will still receive your monthly payment according to the contract you have signed. However, you won’t be able to withdraw important lump sum of money once the money is locked in the annuity. It is important to keep an amount as liquid cash for your emergency as the annuity is not the right product to access your money rapidly.


#3 There are No Free Lunches


The thought of receiving a guaranteed stream of income for the rest of your life is surely appealing. But there are no free lunches in finance and there is a price to pay to enter in an annuity contract. If you select a variable annuity, fees charged through mutual funds are above the market average. Insurance fees, distribution costs along with management fees apply on those contracts. It is not rare they exceed 3%. This is probably where you can call annuities a scam if you don’t do your research probably. There are simple and cheap annuities such as a standard life annuity. The more options and potential return you add to your contract, the higher your fees are going to be.


A good trick to reduce your fees is to buy immediate annuities with no riders (options) and subaccounts (mutual funds with high MERs). If you are comfortable with financial language, you can also purchase your annuity directly with the Life Insurance Company and skip the broker’s commission. However, this is recommended to go through an adviser or a broker if you require further assistance and financial advices. As I’ve written before, there are no free lunches: if you seek for quality advices, you will have to pay for them.


#4 Tax Deferment Doesn’t Rhyme with Tax Disappearing


Deferred annuities offer the possibility of your investment to grow tax free… or this is how it can be presented by some agents. It is true that the investment profit while the annuity grows is not taxable. This only means that you will not be taxed as long as you don’t start withdrawing from your annuity. Once the annuity starts to pays, your payment are subject to taxes. Depending if you annuity is qualified or not (read qualified vs non-qualified annuities to know the difference), the annuity payment could be a 100% taxable revenues subject to the same tax rate of any other income. Then again, annuity payments are not part of a big scam, it’s only a matter of understanding that annuities offer tax deferment but you will still have to pay taxes one day. If you don’t, this means that you will pass your taxes to be paid to your estate at your death.


#5 Annuities are Complex to Explain


If you are searching for the annuity formula, you will be disappointed. Basically, only the actuaries working for the Life Insurance Company knows about the magic formula. The worst part is that they can change the way they calculate the payment from an annuity from month to month.


If you seek for an annuity in exchange of an investment of $200,000, you may want to deal with a broker or call different life insurance company yourself. Each company has their own metrics based on life expectancy assumption, interest rate and market return potential along with managing their own book of annuities. If a Life Insurance Company sold too many annuities to 65 years old this month, they might decrease their annuity payment offered for next quotes to discourage investor from buying. Those actions are necessary to manage the overall risk of the annuity portfolio.


When you purchase an annuity, you agree to put your money in a black box form which you receive an income stream. Payments are guaranteed as per your contract but the way it is calculated is extremely difficult if not impossible to understand.


Your best bet is to contact a broker that will shop around to find the highest paying annuity for you. You can contact a trusted broker to get the best rate here.


#6 There are More Riders than You Can Count


Several kinds of riders are offered for all annuity contracts. A rider is an option you can add to your contract in order to customize your annuity. As you can imagine, the more you customize your product, the more expensive it becomes. You can add riders to improve your annuity payments, add a beneficiary, add extra withdrawals payments, etc. The more riders you add, the more flexible your annuity becomes. But there is a price to pay for each rider.


Ask for different simulations and compare them to the original annuity with no riders in order to understand how much you pay for each added option.



As you can see, annuities are no scam but they are fairly complex. There are very useful and cheap annuities but there is also very expensive one with unnecessary riders. It’s up to you to ask questions and wait patiently for complete answers. If you can’t get a clear answer to your question, this is a good sign you need to change adviser or you may scream for an annuity scam!