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Aug
31
2007
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Consider Insurance, Annuities |
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by Reprinted with permission of Investment Representative Celine Richardson of EdwardJones
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Friday, 31 August 2007 |
 Many people rely on their IRAs and 401(k) plans to help them pay
for their retirement years - and for good reason, because IRAs and
401(k)s are excellent retirement-savings vehicles. But once you
reach the point where you are contributing the maximum amount to
your IRA and 401(k) each year, what else can you do to build resources
for retirement? You might want to consider annuities and cash value
insurance.
Fixed and Variable Annuities
When you buy a fixed annuity, the insurance company puts your funds
into fixed income investments, such as bonds. Your principal is
guaranteed, and the insurance company pays you an interest rate
that is also guaranteed for a certain period of time. At the end
of the guarantee period, the insurer adjusts the guaranteed interest
rate upward or downward. These guarantees are backed by the claims
paying ability of the issuing insurance companies.
If you'd like the potential to earn more than you can receive
from a fixed annuity, you might want to consider a variable annuity.
When you purchase a variable annuity, you place your money in various
accounts that can be made up of stocks, bonds and other securities.
You choose how to allocate your investment dollars, based on your
risk tolerance and time horizon. (Keep in mind, though, that this
investment is called "variable" for a reason; your account balance
will fluctuate along with the financial markets, and there's no
guarantee you will get back all your principal. Furthermore, fees
are associated with each variable annuity benefit.
With either a fixed or variable annuity, you won't pay taxes on
your earnings until you begin taking withdrawals. Be aware though,
that if you are younger than 59-1/2 when you start taking withdrawals,
you will have to pay a 10 percent tax penalty in addition to ordinary
income tax on the amount withdrawn.
Apart from tax deferral, annuities offer at least one other key
benefit: flexibility in taking your payments. You can accept distributions
as a lump sum, spread them out over a certain number of years or
create an income stream for the rest of your life - or even your
life and that of your spouse.
Cash Value Insurance
When you buy permanent insurance, also known as "cash value" insurance,
part of your premium pays for the death benefit (the amount that
goes to your beneficiary), but some of the payment goes to help
build cash value - and this money grows on a tax-deferred basis,
similar to annuities, your traditional IRA and your 401(k).
You can choose from a variety of cash-value insurance policies.
In building cash value, some of these policies rely on variable
investments, such as stocks. Consequently, your cash value will
fluctuate over time, and, as is the case with variable annuities,
you could lose some or all of your principal. However, you can also
choose varieties of cash-value insurance, such as whole life or
universal life, that typically pay guaranteed rates of return. The
guarantees of these products are also backed only by the claims
paying ability of the issuing insurance company.
To access your cash value, you can cancel or surrender your policy
(although, if you surrender it within a few years of purchasing
it, you may have to pay surrender charges) or you can borrow from
your policy and either let the remaining cash value pay the interest
or pay it back yourself .
Ultimately, you can provide a significant boost to your retirement
savings by investing in annuities and cash value insurance. So,
give them some consideration once you've hit the "ceiling" on your
401(k) and IRA.
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