Using An Annuity To Fund Monthly Payments For A Nursing Home
With nursing-home costs largely – or totally – out of pocket, opening an annuity may be a viable way to fund these costs. Here’s what you should know.
An annuity is a contract with an insurance company, which in turn makes a series of regular income payments in return for a premium or premiums that have been paid by clients. These are very commonly bought to fund retirements, and their income is guaranteed to last a lifetime.
Video: Annuities
According to the National Association of Insurance Commissioners, annuity sales on the part of senior citizens are on the rise. These are the different types of annuities that are available:
Single Premium Annuity, where you pay the insurance company a single premium- Multiple Premium Annuity, where you pay the insurance company multiple premiums.
- Immediate Annuity, where you start receiving income payments no more than a year after paying the premium
- Deferred Annuity, where you begin receiving income payments many years after paying the premium
- Fixed Annuity, where your premium earns interest at rates set either by the insurance company or as specified by the annuity contract, minus any charges or fees.
- Variable Annuity, where your money is invested by the insurance company, minus any charges or fees, in a separate account such as stocks, bonds or investments. This can be a riskier endeavor.
- Equity-Indexed Annuity, where the interest rate is tied to an external index. Though this pays a base return, an increase in the index can lead to higher profits.
According to the Insurance Information Institute, an annuity can offer lifetime income by transforming an investment into a stream of payments that last throughout your lifespan. That’s due to a unique pooling of annuity investment, investment earnings, and funds from a pool of people in your group who do not live as long as predicted by actuarial tables. This pooling allows annuity firms to guarantee lifetime income.
Guarantees and Risks
Annuities not only guarantee lifetime income, but they also allow you to save money for a long-term goal such as retirement. They can also lend themselves well to funding education costs.
However, it may be more cost-effective to separately purchase life insurance and tax-deferred investments. Additionally, variable annuities are considered riskier instruments as they are invested in other accounts that may either gain or lose value over time.
Finally, you are unable to access your annuity funds during their growth period without incurring taxes and penalties. Tax-deferred annuities are subject to a 10 percent premature-withdrawal penalty on funds withdrawn before the age of 59 ½. Additionally, insurers impose their own penalties on these withdrawals.
Video: Understanding Annuities
Where Can I Buy An Annuity?
Annuities are sold by insurance companies, banks, mutual-fund companies, brokerage houses, and nonprofit organizations. Shop carefully and do your research before settling on any given offer.
Here are the pros and cons of different annuities.
Variable Annuities:
PathToInvesting.org lists some of the benefits associated with variable annuities. These include:
- Guaranteed minimum payments regardless of the annuity’s performance
- Tax-deferred growth potential
- Opportunity for market appreciation
- Benefits to beneficiaries
- Access to account value
- Spousal benefits
- Good for risk-tolerant investors
Some of the downsides of variable annuities include:
- Contract limitations
- Fluctuation in value
- Market risk
Index Annuities:
Pros include:
- Ability to participate in general market changes while easily monitoring annuity performance
- Tax-deferred growth potential
- Many options
Cons include:
- Early withdrawal penalties
- Multiple options can be confusing
Fixed Annuities:
Pros include:
- Stability of income
- Good for the risk-averse
- Guaranteed interest rates
- Low investment minimums – usually $1,000 to $10,000
Cons include:
- Rates can be fixed for a limited period, after which they may drop
- If you opt for fixed lifetime payments, these will not keep pace with inflation – reducing your purchasing power in the future.