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Myths regarding annuities

Posted: October 13, 2008 10:12 p.m.
Updated: December 15, 2008 5:00 a.m.

Myths surrounding annuities and misconceptions about them have gained a foothold with both the general public and the media. These misconceptions stem largely from a lack of information.

A previous article about "Annuity Pundits" addressed this issue. Many people simply do not understand the purpose of annuity or how one can be positioned within a portfolio to uniquely address and serve investor needs. Not enough information to dispel these myths is coming from the insurance industry.

Following are a few explanations to briefly address some of the underlying benefits and product features so variable annuities are understood and properly utilized.

n Annuities are expensive - A persistent myth is that variable annuities are overpriced, and simply cost too much.

The fact is, their unique benefits often justify any incremental costs, and variable annuities are often not significantly more expensive than other investments. And, there is no other investment that offers some of their "guarantee" benefit.

Since annuities are designed as long-term, tax-deferred vehicles primarily for retirement, they are only offered by insurance companies, and therefore can offer guarantee death benefit for your heirs, or provide you with guaranteed income options you could only receive by an insurance company.

So, are the benefits worth the cost? That depends, if you want tax-deferred growth potential, tax free exchanges, income guarantees and death benefits for your heirs, then a variable annuity has a place in your portfolio.

n Anuities are treated the same as other assets when inherited - The tax treatment of an annuity at the owner's death is often misunderstood.

Many people believe that because annuities don't receive a step up in basis at death, they create a negative tax liability.

In actuality, annuities can have advantages over other investment types.

Annuities are subject to estate and income taxes, and the beneficiary is liable for income taxes. To alleviate the threat of double taxation, the IRS Code that addresses this is called the Income in Respect of the Decedent, or IRD. This provision allows the beneficiary to deduct the estate taxes, paid by the estate, on his or her income taxes.

These are only a few of the reasons that a variable annuity can play an important role in some part of your financial and retirement plan.

With the current financial crises we the taxpayer will be paying for, and causing such volatility in our retirement assets, a variable annuity can play a key role in protecting retirement income for your future.
The many differences and various riders need to be discussed and explained thoroughly with your financial advisor.

Jim Lentini, CLU, ChFC, IAR is president of Lentini Insurance & Investment, Inc., located in Santa Clarita. His column represents his own views and not necessarily those of The Signal.


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