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Frequently Asked Questions About Annuities

FAQ: What is the difference between an immediate annuity and a deferred annuity?

An immediate annuity pays a fixed amount on a regular basis over a period of time. For example, $100 per month for 10 years or $3,000 per year for the life time of the annuitant. A deferred annuity accumulates interest and dividends until the money is withdrawn. You pay the taxes on the income when you withdraw.

FAQ: Will a deferred annuity save on my taxes?

Income Tax: Income earned on an annuity is subject to regular income taxes, but only when the money is taken out of the annuity. Deferred annuities are purchased by people seeking to avoid taking income at today's income tax rates. These people want to defer income to a later date, when they expect their tax rates will be lower. Many retired people are already at their lowest tax rate. When the annuitant dies all the income is withdrawn and taxed in the same year.

Estate Tax: Deferred annuities are subject to estate tax when the annuitant dies.

Net estates greater than $338,000 are subject to Ohio Estate Tax. Net estates greater than $1,500,000.00 are subject to Federal Estate Tax.

Capital Gains Tax: Deferred annuities can be invested in stocks and mutual funds. There will be no step-up in basis for those stocks or mutual funds held in the annuity when the owner dies. Capital gains tax of up to 20% must be paid. Compare this to direct ownership of the same stocks and mutual funds - where the law allows a step up in basis to the value on the date of death for the beneficiaries.

FAQ: Will my money be available when I need it?

Immediate annuities lock in a payment stream - you cannot get your money back faster if you need to. Most deferred annuities have “surrender charges” (penalties for “early” removal of money). Depending on the annuity, “early” can be seven years or even longer. Surrender charges can take a large piece of your investment, if you need to withdraw it. Many deferred annuities let you withdraw 10% of your principal each year without penalty. You should not purchase a deferred annuity if you are likely to need a greater part of your principal back before the surrender charge period has ended.

FAQ: Do I pay a commission to the annuity salesman?

Insurance Agents who sell annuities are typically paid an up-front commission of 3% to 8% of the amount you pay for the annuity. The commission will be paid by the insurance company issuing the annuity. The insurance company recovers the commissions by reducing the return or increasing the charges against the annuity purchaser. Be sure to discuss these “hidden charges” with your agent. Normally, the greater the commission, the greater the surrender charges.

FAQ: Is my money secure?

Annuities are investments. When you purchase an annuity, you invest in the insurance company or other “provider” of the annuity. The financial strength of the provider is very important - if the provider has or develops financial problems, you may lose money. Annuities are not insured by the FDIC.

FAQ: Do annuities count as assets under Medicaid's nursing home care rules?

Deferred annuities do count as assets under the Medicaid rules. Immediate annuities do not count as assets for eligibility purposes, but the monthly payments must be paid for nursing home care.

FAQ: Are annuities a good planning tool under Medicaid's nursing home care rules?

Deferred annuities are not useful Medicaid planning tools. While some immediate annuities can have a role in Medicaid planning, there are other approaches that are often more useful. In the case of couples, when one spouse needs nursing home care and the other does not, Medicaid permits $20,052.00 to $94,260.00 of countable assets. There is very little reason to purchase an annuity for Medicaid purposes before the person has a need for nursing home care. A properly-prepared financial power of attorney will allow the agent to purchase an annuity if and when it is needed.

Prepared By:
Marta J. Williger
Attorney at Law
323-C South Main Street
P.O. Box 368
Munroe Falls, Ohio 44262
(330) 633-7373