Merriman

Can annuity gains be offset against other ordinary capital losses if I want to get out of a variable annuity-since you recommend against them?

The short answer is no. All gains inside an annuity, including capital gains, are taxed as if they were ordinary income. (This is one of the reasons we don’t favor annuities.) Therefore, you won’t have those gains available to offset capital losses.   The article “Fixed Indexed Annuities: Perfect product or a rip-off?” provides some additional insight into the world of annuities.

An insurance contract that takes many forms.  A fixed annuity, usually purchased for a lump sum, promises a regular monthly payment for as long as the owner lives.  A variable annuity combines investment options, life insurance and annuity features in what can become a complex, expensive product.

I am approaching the age of retirement after a career in teaching, and I have a couple of options for taking my pension. One option is to take a single life annuity benefit of $1,040 per month. The other option would give me a lump sum of $35,320 plus a reduced monthly benefit of $793. Which one would be better for me?

The best answer will depend on your unique set of circumstances. A general rule of thumb is to base this choice on your life expectancy. If you live for many years, you’ll collect more by taking the larger annuity. If you live for relatively few years, you’ll collect more with the lump sum.

There are two main risks involved in this choice. One is that you might live a very long time. The other is inflation. Unless your annuity payment is protected by a cost-of-living adjustment, inflation will erode your monthly income over time. (more…)

Much of the financial industry is hurting these days, and you can bet that Wall Street is working overtime to hook investors in one way or another. Insurance companies are promoting a product that looks (at least to them) like a winner, especially during tough times.

You can barely pick up a financial publication lately without seeing ads for fixed indexed annuities, often called equity index annuities. The ads promise a lot. But does the product deliver the goods?

Many investors seem to think so. An estimated $26.7 billion went into equity index annuities in 2008, according to AnnuitySpecs.com’s Advantage Index Sales & Market Report. I think there are three main reasons. First, they offer downside capital protection at a time when nothing seems to be working for investors. Second, they seem to offer market-like returns. Third, sales representatives are being paid high commissions to push them.

If you haven’t seen or heard the pitches for equity index annuities, you probably will before long. Wall Street has identified this as a profitable product – profitable, that is, for Wall Street.

The Claims

Here’s what you may be told: With a fixed indexed annuity you get a guaranteed minimum rate of return or the return based on an underlying stock index, whichever is higher. What could be nicer? Upside potential and no downside risk. Wall Street would like you to believe that finally somebody has devised a product that’s on your side all the way.

Technically, the claims are accurate. If you wait long enough (think about up to 16 years), you can get all your money back plus some return. However ……. (more…)