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Annuities are most undersold products in the financial world. Almost 90% of the financial advisors do not sell annuities as they consider them as not a very good investment vehicle.

What are annuities?

Annuities are provided by almost all life insurance companies where it is a type of contract, which guarantees a fixed amount of monthly/ yearly payout until the death of the client. Since the payout is guaranteed, it is independent of market conditions and the interest rates.

How annuities are different than GIC’s?

Annuities get a slightly better tax treatment than GIC’s. for example, if a client 65 years old purchases a 100K annuity he will receive almost $8000 per year in annuity payments. However only about $2000 will be taxable as the remainder will be consider as return of capital. On the other hand, if GIC guarantees $3K interest it will be taxed at the highest marginal tax rate as it is an interest income.

What is my option if I am a senior and I want to leave this $100K as inheritance?

Back-to-back annuity is very good option for senior in the age of 65-75 and who are healthy. For sake of comparison, let us compare it with a 4% GIC and the life expectancy is 90. With GIC 4% the client will be taxed annually $2000 as it is generating interest income. The client will net out after taxes $164,061. On the other hand, if the client gets a back-to-back annuity, he can fund a life insurance policy of $250,000. This clearly shows increase in net worth of almost 90K just by changing the strategy.

What are other factors to be considered while purchasing annuity?

Annuity should be considered only when you don’t need the funds as you will not have access to the funds. Back-to-back annuity is good option when you want to leave a legacy for your family and loved once.

What are some other disadvantages of back-to-back annuities?

The pay out will be to your beneficiaries and it will be thru life insurance. There will be no payout in case of suicide in first 2 years and the claim can be declined in case of misrepresentation in the life insurance application.

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