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Annuities: The Real Truth
People tell us that when they were offered annuities, they were
told about benefits. On further investigation, some of these alleged benefits
don’t hold water.
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Alleged Benefit
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The Real Truth
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Annuities don’t count as assets under Medi-Cal’s nursing home
care rules
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Deferred annuities do count as assets under the Medi-Cal
rules. |
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At times, certain immediate annuities do not count as assets for
eligibility purposes – but the Department of Health Services seeks
recovery against them after the Medi-Cal user has died. |
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Annuities are a good planning tool under Medi-Cal’s nursing home
care rules
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Deferred annuities are not a useful Medi-Cal planning tool. |
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There is very little reason to purchase an annuity for Medi-Cal
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. |
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While some immediate annuities can have a role in Medi-Cal
planning, there are other approaches that are often more useful. |
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In the case of couples, when one spouse needs nursing home care
and the other does not, Medi-Cal permits at least $103,640 of
countable assets (and at times much more). |
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Most times, IRAs, 401(k)s and similar retirement accounts don’t
count as assets for Medi-Cal eligibility calculations. |
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A deferred annuity will save you taxes
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The income portion of annuity payouts is subject to regular income
taxes. |
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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. This is just not the case for many retired people. |
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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. Compare this to direct
ownership of the same stocks and mutual funds –
where the maximum long-term capital gains tax rate is 15%, and the
capital gains tax disappears when the stock or mutual fund is owned at
death (thanks to step-up in basis). |
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Only net estates greater than $2,000,000 are subject to Estate
Taxes. |
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Your money will be available when you need it
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Most deferred annuities include “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. |
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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. |
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Immediate annuities lock in a payment stream – you cannot get
your money back faster if you need to. |
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You don’t pay any commission, or my commission doesn’t matter
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The salesperson typically earns an up-front commission for selling
the annuity (often 3% to 8% of the amount of the annuity). The
commission will be paid by the insurance company issuing the
annuity. |
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The insurance company has to recover the commissions by reducing
the return or increasing the charges against the annuity purchaser.
Normally, the greater the commission, the greater the surrender
charges. |
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Your money is secure
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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, the holders of
their annuities may be hurt. |
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May 2007
Don't forget to Ask
First!
Already Purchased an Unsuitable Annuity? Go to our Who
Can Help section for information on who to complain to.
This is Part 4 of the Special
Report - go to Part 5.
© 2008 All Rights Reserved. H.E.L.P. 1404 Cravens Avenue, Torrance, CA 90501 (310) 533-1996 Terms of Use |
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| AnnuityTruth is provided as a community service by H.E.L.P., an awardwinning, private, I.R.C. §501(c)(3) nonprofit
education and counseling center
providing impartial information to older
adults and their families on elder care, law,
finances, consumer protection and more. |
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