Annuities: The Swiss Army Knife of Financial Planning

Due to rising interest rates, annuities are once again becoming a part of the conversation for financial advisors looking for safe-haven alternatives for their clients. Annuities are an attractive option for clients looking for competitive rates and guarantees. However, while advisors have always looked to annuities as investment return vehicles, their real value is their utility as planning vehicles. Annuities are the Swiss Army Knife of financial planning.

Here are five financial planning strategies in which annuities can play a critical role:


1. Legacy Planning

According to the LIMRA LOMA Secure Retirement Institute, 95% of annuities are never annuitized. This means they are not converted to a guaranteed stream of income and are instead passed through to beneficiaries as a death benefit. If that is your clients’ intent, why not add a death benefit enhancement rider, which could boost the death benefit by as much as 90%? The only caveat, is the beneficiary must take the proceeds over a five-year (or longer) payout.


2. Post-Retirement Health Care Planning

According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple will need approximately $315,000 (after tax) to cover their health care expenses. While Medicare should cover most health care costs in retirement, it is estimated that, on average, about 15% of a retiree’s annual expenses will go to health care. That includes Medicare premiums, copays, and deductibles.

The costs can be significantly higher for retirees earning more than $91,000 ($182,000 for married couples). The Income-Related Monthly Adjusted Amount (IRMAA) can increase monthly Medicare Part B premiums to as high as $578 or nearly triple the baseline premium. The IRMAA assessment is based on a two-year lookback of your Modified Adjusted Gross Income, and many are unaware of this.

One of the more commonly used planning solutions for covering health care expenses in retirement is to carve out a lump sum of money and place it in a deferred annuity.


3. Long-Term Care Planning

Not included in that $315,000 health care expense figure for retirees is the cost of long-term care, which can boost out-of-pocket costs by more than $50,000 a year. You can use the same planning approach of setting up an annuity dedicated to health care costs. Did you know that a Pension Protection Act (PPA)-compliant annuity could create as much as four times the benefit?

For example, by purchasing a $100,000 PPA-compliant annuity—or converting an existing annuity through a 1035 exchange—you can create as much as $400,000 as a long-term care reserve that can pay for qualifying extended care expenses with tax-free distributions.


4. Social Security Planning

Many retirees do not know about Social Security tax. That is the provision that allows the IRS to tax up to 85% of Social Security benefits when your gross earnings from all sources exceed $34,000 ($44,000 for joint filers). Income sources include retirement plan distributions (except Roth’s), dividends, capital gains, and even tax-exempt income—but not income from an immediate annuity.

Immediate annuities also deserve a closer look as rising interest rates translate into higher income payout rates.


5. Charitable Planning

Charitable gift annuities (CGA) have long been a preferred method for the charitably inclined. A CGA is set up as a contract with a 501(c)(3) charitable organization that guarantees to pay the donor, or annuitant, a guaranteed lifetime income in exchange for the remainder of the annuity. The charity gets immediate use of the funds, and the donor receives a current tax deduction on a portion of the gift.

First American Insurance Underwriters gives you access to all the top annuity providers. We also have in-house expertise to help you develop the best annuity solutions for your clients.


By Ed Stone, LTC, DI & Annuity Specialist