What you need to know about non-qualified annuities

Faced with the current unfavorable economic conditions, many candidates for retirement are concerned about their financial capacity. Inflation remains high, coupled with soaring interest rates on borrowing. Financial advisors and personal loan management experts may recommend adding more sources of income to cover living expenses and loan repayments in retirement.

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It's no surprise that many people put off any retirement plans and return to the hustle and bustle of the office. A recent survey indicates that retirement delays in the private sector have doubled over the past year.

However, in a context of endemic financial insecurity, more and more opportunities are offered on the market. It may not be too late to compare various financial products and buy one for retirement.

Retirement savings accounts and investments are the most common sources of retirement income. But there are other ways to improve your finances while strengthening the protection of your assets.

Life insurance might be the first thing you consider, but do you know about annuities? Research shows that 39% of investors aged 55 and older are not. While that sounds like a lot, it's still a noticeable improvement from 47% in 2014. Of those who understand these financial plans, more than 80% appreciate their value, which is an increase from previous pre-pandemic levels.

People are learning important lessons from the events of the past two years. This article examines annuities and how they work to provide you with retirement income.

What is a non-qualified annuity?

Annuities are insurance contracts issued by financial institutions such as banks and insurance companies, which guarantee a fixed investment fund payment in the future. You can invest in them or buy them with premiums or lump sum payments.

After accumulating funds, you can start receiving payments on a fixed schedule for a specific period or for as long as you are alive. Even better, you can structure an annuity into different financial instruments, giving you more flexibility. Thus, annuities provide an efficient stream of retirement income if your savings are insufficient.

Annuities provide a steady cash flow to retired annuitants in addition to other regular income. It assures you of a stable stream of income even if you outlive your assets. In the event that more than savings and investment dividends are needed, it is a good idea to consider purchasing an annuity contract.

But before we focus on non-qualifying annuities, we must first differentiate annuity products from life insurance. The table below shows the basic difference between the two financial products.

Life insurance vs annuity Life insurance Annuity A death benefit, so not a pension plan. Payment is distributed as long as the recipient is alive. Dependents receive income. Policyholders receive fixed payments as a stream of income. Life insurance is not subject to income tax. Subject to tax, but extent varies by type.

In simple terms, annuities are the opposite of life insurance. They may or may not be qualified, which determines how taxes may apply to them. A nonqualified annuity is an investment vehicle purchased with after-tax dollars. This can help reduce taxes in retirement while providing tax-deferred income.

But that doesn't mean you can use them to avoid taxes altogether. You don't have to pay tax as your money accumulates; instead, you will pay taxes when you receive a payment. Withdrawals and lump sum payments are taxed as ordinary income, not capital gains. The good thing is that it only applies to non-qualifying earnings or annuity income since taxes are already deducted upon purchase and contribution.

For example, suppose you purchase a retirement plan. Once you reach retirement age, you can either take withdrawals or make them profitable. If you choose the former, taxes apply as last in, first out (LIFO).