Advantages and Disadvantages of Annuitization

As you are aware, annuitization is applying the proceeds, the annuity value, to a settlement option that will provide a guaranteed level of income for a set period of time like 10 years or for as long as one lives or for as long as one's surviving spouse lives.

There are several advantages of annuitization.

Advantages

1. Less anxiety. You are assured of a guaranteed stream of income for x years or for as long as you and/or your spouse are alive.

2. You will not outlive your money.

3. Tax-advantaged income. Since an exclusion ratio is used in determining the percentage of dollars excludible from income taxes as a return of principal, only part of the income received during one's life expectancy will be taxable.

Disadvantages

1. You cannot, generally speaking, surrender your immediate annuity and reinvest those proceeds in another alternative.

2. In an increasing interest rate environment, your fixed payments from your fixed annuity will remain fixed in spite of higher interest rates.

Tax Ramifications / Non-Qualified and Qualified Annuitization

As discussed above and on several other occasions, payments received from a Non-Qualified Annuity are partially excludable from income taxes based on an exclusion ratio.

In the Qualified Market, payments received are often fully taxable since dollars received have never been taxed.

As you will soon see, the annuity, like all financial products, has advantages and disadvantages. Fortunately, the advantages can be quite impressive. However, proper client suitability can NOT be successfully achieved unless and until we recognize that the AGE of our client can have a direct impact on our recommendations. Below, we identify the advantages and disadvantages for consumers a) under 60 years old and b) over 60 years old. In the beginning, we list the advantages and disadvantages which can be unique to the age. Thereafter, we list the advantages and disadvantages as it relates to all ages.