A new concept has been created in the form of a hybrid product that has most of the good features of an annuity, and eliminating most of the less desirable features. Under the wrapper of life insurance the Non-Annuity offers some very interesting features not found in a conventional annuity.
The major improvement over annuities is that the Non-Annuity has an increasing tax-free death benefit. So instead of leaving beneficiaries a possible large tax bill, you are leaving them a potentially very large tax-free death benefit. Considering the fact that current wisdom is that taxes are going up considerably, this way of transferring wealth to your loved ones unencumbered by taxes has a major advantage with the Non-Annuity.
One other advantage over conventional annuities is liquidity. Many annuities have very punitive high surrender penalties, which can be problematic if those funds are needed. The Non-Annuity is very liquid with a guarantee of your investment funds back at any time, plus potential returns. Some of the Non-Annuity contracts even have a waiver of surrender penalty rider that can give you even more liquidity.
You have several investment choices ranging from indexing to the Standard and Poor’s 500 and other popular indexes to a high interest fixed account. Unlike annuities with very low caps on potential returns, the Non-Annuity has very large caps or even no caps at all.
One drawback of some conventional annuities is fees. As a matter of fact they can be as high as 3% in some variable annuities. This equates to $1,000.00 a month in fees for a $400,000 annuity. With the Non-Annuity there is a mortality fee to provide the income tax free death benefit. Most policy holders are more than willing to pay a small fee in return for an income tax free death benefit.
One particular Non-Annuity contract even has an innovative investment option that gives policyholders 140% of the performance of the S&P up to the allowable cap. Depending on your age that extra 40% might be enough to cover all the internal mortality charges.
A single premium deposit into a Non-Annuity likely will cause it to become what is called a Modified Endowment Contract (MEC). That means even although the death benefit is income tax free, you would have to pay taxes on money you take out during your lifetime up until your basis (your original investment)
There are options to avoid the taxation. If structured properly your Non-Annuity can give you both tax free income plus a large tax free death benefit.
One negative about the Non Annuity is the fact that it is underwritten because of the death benefit feature. This may make this product unavailable for a segment of the buying public.
There are some products that have very liberal underwriting and can put the Non-Annuity in reach of most consumers.
In conclusion; if you are in general good health and want an alternative to an annuity the Non- Annuity may be the product for you. Please remember that the annuity market is an ever changing landscape. What is available today will most likely change in the future.
This information should be considered general in nature and specific products should be explained in detail by a financial professional.
A Word About Death Benefits:
Variable and fixed annuities can be taxing. Planners love to boast that you won't pay taxes on the money that's growing inside an annuity, because its "tax deferred". That's true, but it’s only half the story. You'll pay ordinary income taxes on every dollar of annuity withdrawals until you reach your basis. On qualified annuities (IRA annuities) every single dollar you withdraw is taxed as ordinary income in the year you receive it.
Further, the tax disadvantage won't die when you do. It can hurt your heirs. That's because your beneficiaries will be saddled with paying tax on any profit your annuity generated. If your original $500,000 annuity grew to $750,000, your heirs would owe tax on the $250,000 profit. In contrast, if you had placed your money in taxable mutual funds, because of the step-up in basis, your kids would get that $250,000 tax free.
But even better had those funds been in a Non-Annuity depending on performance you would be leaving them almost $2,000,000 totally income tax free.
If you and your spouse both own a qualified annuity you are leaving your heirs a tax time bomb.
Not only will they have to pay taxes on 100% of all the assets they receive in the year they inherit them, but worst of all it is all taxed as ordinary income. With the new tax rates that went into effect in 2013 the impact of such an inheritance could elevate them into a whole new punitive tax bracket.
Since The Non-Annuity offers a 100% income tax free death benefit to your beneficiaries, it is a far more suitable product for leaving a legacy.