Blog
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:
Illiquidity
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.
