Select Page

There are a number of financial tools that are designed to help protect wealth. One example that can serve this purpose is an annuity.

What is an annuity? At its most basic, an annuity is a contract that results in an agreement by an insurance company to provide a fixed payment to the intended beneficiary. An annuity can serve a number of purposes. Two examples include the use of an annuity as a retirement planning tool or as a means to distribute assets from an estate.

An investor can structure an annuity to achieve various goals. It can provide payment either immediately or at a later date, for a set period of time or for the remainder of the beneficiary’s life. In theory, the benefit of this form of investment is the security that comes with the guaranteed payment and, for some, the freedom of not needing to research investment options.

What are the risks with this type of financial planning tool? Although these financial tools can serve a number of estate planning needs, there are some points of caution to take into consideration before purchasing an annuity:

  • Due diligence. It is important to complete due diligence before choosing an annuity. These policies are products of insurance companies. If the insurance company were to fail, the annuity is likely lost. As such, it is wise to purchase the annuity from a well-respected company. An investor can further mitigate any risk by purchasing annuities from several insurers, instead of just a single provider.
  • Timing. This goes along with the first point. Part of purchasing an annuity is purchasing it wisely. These policies are often based on interest rates. It is generally best to purchase the policy when interest rates are high, as the annuity will likely yield a higher payment.

When structured wisely, an annuity can help transfer wealth in an efficient manner, reducing the estate’s tax obligations and ultimately maximize the wealth of the estate.

Annuities are just one of many financial tools that can help meet this goal. As such, it is wise for those with high-asset estates to seek legal counsel when structuring an estate plan.