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Paul Rifenberg CLU, ChFC

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What is an annuity and why do I want one?

An annuity is like a bank savings account or CD, except that it is offered by an insurance company. In addition, an annuity can be used to provide tax-favored income for various periods of time.

How is it different than a CD or Money-Market Account?

Interest earned on a CD or Money Market Account is taxable in the year it is earned, regardless of whether you take it or not. Interest on an annuity is tax-deferred until it is withdrawn.

Should I be concerned about paying taxes on my interest income?

Of course you should. Taxes on your interest reduces your yield. For example, if you have a 4.00% certificate of deposit, and your tax bracket is 33%, your actual net yield is only 2.68%. Your annuity will compound at the assumed rate without taxes.

But I have to pay taxes on the interest when I take it out, so what's the big difference?

Even if you took all the accumulated value at once, your gain would be greater than if you had paid current taxes on an annual basis. The reason for this is that the entire interest balance is free to compound tax-deferred, not just the after-tax portion, as in a CD or other type of after-tax savings account. Also, you can choose to pay the taxes in a year that your other income may have declined, or you can spread the taxes due over a number of years.

But the bank is FDIC insured. How safe is my annuity account?

VERY, very safe. Life insurance companies are generally bigger than banks, to begin with. They're licensed and regulated by all the states they do business in, and backed by the legal reserve system. Not a single customer of any life-insurance company has ever lost a dime due to insolvency in the history of our country, and that includes the Great Depression. Personally, I don't write anything unless the carrier is rated A (Excellent) or better, by A.M. Best Company.


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