Many annuity owners lose half of their annuity value and most are not aware of it! Take a look at the followitng example.

Mary, age 55, purchased a fixed annuity for $50,000. She held it for 10 years and the interest accumulated nicely. The account doubled to $100,000 (a compounded rate of 7.17%). So far Mary was very happy with this alternative. She never gave much thought about what happens to the annuity at her death. She figured she would eventually withdraw the money and use it. The truth is that less than 10% of annuity owners make any withdrawals from their annuity. If the owner passes away, the policies can get hit with some very large taxes. In Mary's case, here's the picture at death when the taxes are due:

Annuity Value: $100,000

Income Tax -20,000

Estate Tax -32,000

Beneficiaries get $48,000

Is there a remedy? Yes! Mary could annuitize the annuity (deferred taxes or sales charges could apply or a 10% tax penalty if under age 59 1/2). When you annuitize the annuity, you select a payout option that may include a lifetime income from the annuity company. You trade the $100,000 balance for a guaranteed income for life. Mary had her insurance company make monthly payments to her of $700. She used the after tax dollars to purchase a life insurance policy on her life, payable to her beneficiaries. She purchased a $275,000 universal life policy with a death benefit guaranteed to age 115. Now, instead of Mary's heirs getting only $48,000 at her death, the heirs receive $275,000 of life insurance death benefit, free of income taxes. (The proceeds of the life insurance policy can be kept out of the estate through proper estate planning). That is almost 6 times as much money for the beneficiaries.

Before 1984, Social Security income was tax free.  Today, however, taxpayers are paying tax on up to 85% of their Social Security income.  The good news is that annuities can reduce or eliminate the income tax on your Social Security income.  The IRS calculates the tax on your Social Security income based on your total income from all sources.  However, income you earn on an annuity that is reinvested does not appear on your tax return.  Therefore, annuities may reduce your total income for Social Security taxation purposes.  Tax free bonds will not reduce the tax on your Social Security income as tax free bond interest is included for Social Security taxation purposes.  In fact, if you shelter enough income in annuities and bring your income below the thresholds (adjusted gross income of $25,000 for a single taxpayer and $32,000 for a married taxpayer) you then pay no tax on your Social Security income.

It is possible to get a safe return on your money with an immediate annuity.  An immediate annuity is simply the payment of a premium to an insurance company.  In exchange, the company provides you a monthly income for life.  You cannot outlive this income!

Here's an example:  A 76 year old gentleman paid $50,000 in premium to an insurance company.  He now receives $485.80 per month, every month.  That's $5,829.60 each year of checks in the mail.  For $50,000, where else can you get a guaranteed $5,829 every year for the rest of your life?  Regardless of how long this man lives, he gets his check every month.  And if he dies early, his beneficiaries will receive the 485.80 each month until the $50,000 in payments have been received in total.  This is called the "installment refund" provision.  There is no way to lose the initial amount of money on such an annuity, yet payments continue for life.  This can be a very good way to get a guaranteed return on your money.