What is a Non-Qualified Annuity?

Picture this: You have a piggy bank where you stuff extra notes and coins. This piggy bank, in return, gives you every month once you are grown. That's how a non-qualified annuity works. But how exactly does it work? Why should you put your hard-earned money into it? And what if it gets lost? You might be having endless questions. Fret not because this informative article contains the essentials you must know. It explains in detail what a non-qualified annuity is and its benefits. In addition, it covers the drawbacks. Kindly read it for more insights.


Detailed Explanation

A non-qualified annuity is an insurance product that aims at providing you income when you are retired. You pay it using after-tax dollars, meaning you will have paid tax on the money before depositing it in the insurance account. This insurance product works by you depositing the funds in a lump-sum payment to the insurance company. You can then receive the periodic payment immediately or later. Read here to learn more.


These funds are safe because the annuity insurance company backs them. In a nutshell, your money will be secure regardless of the company going broke. There are different types that you can choose depending on your financial situation.

·         Immediate annuities

·         Deferred annuities

·         Variable annuities

·         Fixed annuities


Unmatched Benefits

Putting your savings in this magical piggy bank comes with several advantages. Here are some of them:


Guaranteed income

As mentioned, this insurance product guarantees a fixed income once you cannot work. Investing in this insurance product will give you peace of mind and financial stability when needed. Besides, the non-qualified annuity offers longevity protection. You will always have your life savings.


Tax advantage

Since you paid tax when depositing, you will enjoy some tax benefits when withdrawing the funds. You will pay comparatively less tax. The taxation on this income is based on the exclusion ratio, return on principle (excluded from tax), and earnings(taxable). A  portion of your payment from the annuity is considered a return of your principal, the initial amount you invested. Therefore, it won’t be taxed. The rest is subjected to income tax because it is considered interest.


No Required Minimum Distributions (RMDS) at certain age

Unlike other retirement accounts, non-qualified annuities do not require a mandatory withdrawal after 72 years. This feature gives you more control over your savings and enables efficient planning.


Legacy planning

This insurance product also allows legacy planning, where you can pass your savings to your beneficiaries. You can do so through the death benefit option or beneficiary designation. This process will avoid lengthy probate and provide stability to the beneficiaries.


Possible Drawbacks

As with anything, this insurance product comes with some drawbacks, which are as follows:



Saving in this piggy bank denies you access to the whole sum regardless of how badly you might need it. Remember that early withdrawals or surrendering leads to hefty penalties and fees. This feature can lock you out of high-return investment opportunities.


Attract fees

This fund also attracts administrative and management fees. Read here to learn more about the percentage and how the fees are calculated. The fees and extra costs may inconvenience you if you had planned for the funds. Therefore, ensure that you understand the terms before committing to it.

Saving for your rainy days is critical. A non-qualified annuity provides the best opportunity to save. However, understanding this insurance product before investing is essential. That's why using the information you have read here would be best. 

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