THE SAVAGE TRUTH ON ANNUITIES
Risks and Rewards
Insurance companies have a special tax deal, authorized by Congress, that other financial companies simply can’t match: Any extra money inside a life insurance policy can grow tax-deferred, thus building up a huge pool of cash. Then this money can be borrowed out of the life policy tax-free, usually reducing the death benefit by the amount of the loan plus any accrued loan interest over time.
What if you don’t need the life insurance and just want the tax-deferred buildup of cash? The insurance companies and Congress created tax-deferred annuities, which are investment accounts that also allow a buildup of cash inside a policy. The only insurance connected with these annuities is typically a guarantee that at death your account will be worth at least what you originally invested.
Tax-deferred annuities are not life insurance policies; they are tax-deferred investment opportunities—at either a fixed or variable rate of return—inside an insurance company contract. In recent years, insurance companies have become very creative about offering investment opportunities, and guarantees, within these products.
As a result, tax-deferred annuities have become increasingly popular for retirement savings for people who have maximized their use of 40l(k) or 403(b) plans or individual retirement accounts. In fact, some of the guarantees are so attractive that these products are actually being used inside retirement accounts that are ...