The Pros and Cons of Annuities
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Index Annuities - Immediate Annuities
The investment that keeps on screwing over your loved ones after you die: Your beneficiaries must now pay taxes on gains!
With annuities, if you die, there is no so-called "stepped up" tax basis for your beneficiaries. That means they will have to pay income taxes on any growth of your annuity that occurred from the time you initially invested in the annuity.
This contrasts with normal investments like stocks, mutual funds and ETF's, in which your beneficiaries only pay taxes based on the value of the investment at the time of your death. So with other investments your beneficiary's cost basis is "stepped up" to the value at the time of your death.
So for example if you invested $50,000 in an annuity and then died when it was worth $100,000, and then your daughter inherited it, she would owe taxes on that $50,000 gain. Nothing like screwing over your beneficiaries long after you die! If you had instead invested in stocks, mutual funds and ETF's then she would owe NO taxes on gains. Now imagine how much that money might be worth at the time of her retirement if she were to invest it! Unfortunately, thanks to your mistake of following the advice of a non-fiduciary investment adviser, broker, insurance salesmen or bank employee to invest in an annuity, she won't ever get to enjoy that extra money.
Insurance salesmen love to use the red herring talking point that with an annuity your heirs can avoid the expenses of probate. What they are referring to is that in the annuity contract you are asked to name a beneficiary in case you die. What they aren't telling you is that a last will and testament achieves the same thing. Everyone should have a will. Simply invest in normal investments like ETF's and create a will.
Sometimes insurance salesmen will try to sell an annuity to someone who wants to give money to their children in such a way that they won't get access to it until they are older. Unfortunately an annuity is meant to be held until age 59 1/2. That is insane! You never want to lock money away for that long and with all of the disadvantages that annuities have. Instead Mr. Annuity salesman should be advising you to speak to an attorney about setting up a trust or living trust, which allows you to control when they can access the money.
Why selling and flipping annuities is much safer than robbing banks
Another investment adviser sold variable annuities to 8 senior citizens between the ages of 72 and 87. Variable annuities were inappropriate for investors of this age group. This earned the adviser a whopping $98,000 in commissions! While the Missouri State Commissioner of Securities suspended this adviser's license for 4 months and she was prohibited from selling variable annuities or working with anyone over the age of 65, she was ONLY fined $25,000 -- For a net profit of $48,000!!!! That's a nice handsome reward for giving unsuitable investment advice!
Were you sold an annuity when you were in your 70's or 80's? Or are you perhaps only 65 and older but sold an annuity that has a surrender period longer than your life expectancy? If so the broker who sold you the annuity policy may have broken the law. You should contact a securities attorney immediately.
You can't write off annuity loses
With normal investments like stocks you can write off loses. Not with annuities. If one of your variable annuity sub-fund groups loses money you can't sell it off in order to strategically offset gains. This is yet another tax disadvantage that annuities offer.
