Annuities are a type of insurance that provides periodic payments. Depending on the particular contract, payments can either last an agreed upon number of years or terminate when the insured person passes away. The reason most people like to purchase annuities is that, instead of having to pay taxes when investments accrue, taxes can be delayed until the insured person starts to receive scheduled payments. For a soon-to-retire senior, purchasing annuities is not usually recommended as the best way to go. 

The two basic categories for annuities are immediate and deferred:

  • Immediate annuity:  The insured person starts receiving monthly payments shortly after investing a required amount, referred to as the “premium.” The chief benefit of an immediate annuity is that it locks in a monthly income stream.
  • Deferred annuity: Once the premium has been paid, the insured person starts receiving benefits after a specified time period has passed.  This period – referred to as accumulation – reflects the minimum time set for investments to earn interest. The chief benefit of a deferred annuity is that its profits will not be taxed until they are withdrawn.

Once withdrawn, the interest earned from annuities will be taxed as earned income. This means that the capital gains protections afforded stocks, bonds and other assets do not apply to annuities.

For deferred annuities, insurance companies typically impose penalties or surrender charges for early withdrawals. Although policies differ, time limitations for such surrender charges have been shown to range from one to twenty years.  Seniors who cannot gain access to their investment funds may suffer severe financial hardships.

Deferred annuities are either fixed, variable or have portions of both.  In a fixed annuity, the insurer locks in a low, fixed rate of return.  This means that the insured person will receive the same payments every month. Unfortunately, inflation can eat away at the value of locked-in fixed payments.

With variable annuities, earnings rates and monthly payments can rise or fall depending on how the investments perform. Should investment returns not do well, both the insured senior’s monthly income and the original investment will be at risk.

Current California law contains safeguards for people 65 and older who are thinking of investing in annuities. Any insurance agent who appears at a senior’s home must provide at least 24-hours written notice of the senior’s legal rights to contact California’s Consumer Hotline for information and/or to file a complaint at 800-927-HELP or 800-927-4357.

When the scheduled appointment takes place, the insurance agents must provide their business cards or other written identifications. They must give the senior formal written notice that purchase of the annuity might result in tax consequences, early withdrawal penalties and other identified costs.

Under California law, every senior who purchases an annuity must be given at least 30 days to review the policy. Within that time, should the senior decide to withdraw, the insurance company must void the contract and, within the next 30 days, refund all sums paid.

Annuities are a type of insurance that provides periodic payments. Depending on the particular contract, payments can either last an agreed upon number of years or terminate when the insured person passes away. The reason most people like to purchase annuities is that, instead of having to pay taxes when investments accrue, taxes can be delayed until the insured person starts to receive scheduled payments. For a soon-to-retire senior, purchasing annuities is not usually recommended as the best way to go. 

The two basic categories for annuities are immediate and deferred:

  • Immediate annuity:  The insured person starts receiving monthly payments shortly after investing a required amount, referred to as the “premium.” The chief benefit of an immediate annuity is that it locks in a monthly income stream.
  • Deferred annuity: Once the premium has been paid, the insured person starts receiving benefits after a specified time period has passed.  This period – referred to as accumulation – reflects the minimum time set for investments to earn interest. The chief benefit of a deferred annuity is that its profits will not be taxed until they are withdrawn.

Once withdrawn, the interest earned from annuities will be taxed as earned income. This means that the capital gains protections afforded stocks, bonds and other assets do not apply to annuities.

For deferred annuities, insurance companies typically impose penalties or surrender charges for early withdrawals. Although policies differ, time limitations for such surrender charges have been shown to range from one to twenty years.  Seniors who cannot gain access to their investment funds may suffer severe financial hardships.

Deferred annuities are either fixed, variable or have portions of both.  In a fixed annuity, the insurer locks in a low, fixed rate of return.  This means that the insured person will receive the same payments every month. Unfortunately, inflation can eat away at the value of locked-in fixed payments.

With variable annuities, earnings rates and monthly payments can rise or fall depending on how the investments perform. Should investment returns not do well, both the insured senior’s monthly income and the original investment will be at risk.

Current California law contains safeguards for people 65 and older who are thinking of investing in annuities. Any insurance agent who appears at a senior’s home must provide at least 24-hours written notice of the senior’s legal rights to contact California’s Consumer Hotline for information and/or to file a complaint at 800-927-HELP or 800-927-4357.

When the scheduled appointment takes place, the insurance agents must provide their business cards or other written identifications. They must give the senior formal written notice that purchase of the annuity might result in tax consequences, early withdrawal penalties and other identified costs.

Under California law, every senior who purchases an annuity must be given at least 30 days to review the policy. Within that time, should the senior decide to withdraw, the insurance company must void the contract and, within the next 30 days, refund all sums paid.