Why High Net Worth Individuals Use Annuities

Shawn Plummer

CEO, The Annuity Expert

Hello dear readers, and welcome to our informative discussion today. We will delve into the financial world and address a topic that has been a head-scratcher for many—why would a rich person get an annuity? This question, seemingly counter-intuitive initially, unravels a wealth of understanding about intelligent investing and strategic financial planning. So whether you’re a high-net-worth investor or just dipping your toes into financial planning, this guide has something to offer you.

Understanding Annuities

Firstly, let’s clarify what an annuity is. An annuity is a financial product, typically sold by insurance companies, designed to accept and grow funds from an individual and then, upon annuitization, payout a stream of payments to the individual at a later time. The period when an annuity is being funded, and interest accrues is called the accumulation phase. The period when the annuity is paid out is called the annuitization or distribution phase.

Why High Net Worth Individuals Use Annuities

Annuities And The Wealthy

Do you want to know one of the best-kept secrets of high-net-worth individuals? They use annuities for various reasons, including estate planning, tax savings, etc. This guide will discuss some of the most common reasons high-net-worth individuals use annuities. We will also provide you with some helpful information on how to get started with an annuity if you are interested in this type of investment.

Why Would Anyone Want an Annuity?

A key question is: why would anyone want an annuity? While annuities might initially seem complicated, they are attractive for various reasons. Annuities provide guaranteed income, tax-deferred growth, and protection from longevity risk—the risk of outliving one’s savings. These benefits make annuities a reliable investment option for individuals, regardless of their wealth status.

Who Benefits Most From Annuities?

While annuities offer advantages to all types of investors, they are particularly beneficial for individuals with a longer life expectancy, individuals who worry about outliving their savings, and those seeking a stable income stream in retirement. This includes high-net-worth individuals who may have more to protect and a desire to maintain a particular lifestyle into retirement.

Example: Consider an investor nearing retirement with no guaranteed income sources like a pension. An annuity can provide them with a regular, reliable income stream, ensuring they can maintain their desired lifestyle without fear of running out of money.

Why High Net Worth Individuals Use Annuity

12 Reasons Why High Net Worth Individuals Buy Annuities

  • High Net Worth individuals often take their pensions in a lump sum and do not have sufficient income for retirement, thus needing a source of funds for fixed expenses.
  • Annuities can provide guaranteed income through conversion to a Single Premium Immediate Annuity (SPIA) today or use an income rider in the future.
  • Fixed and fixed index annuities provide guaranteed income with the ability to earn interest.
  • Fixed and fixed index annuities shelter income from being taxed until the owner decides to take the income.
  • Fixed and fixed index annuities provide a limited risk to their principal.
  • Individuals avoid taking the money they need each year out of investments because they fear running out of money. Fixed and fixed index annuities with minimum guarantees help individuals overcome this fear by providing withdrawal options that may be free of surrender charges.
  • Fixed and fixed index annuities provide the future principal required to take care of a surviving spouse, a child, or even charity.
  • Fixed and fixed index annuities can help protect capital and maintain access to funds (subject to a surrender charge). In addition, they may provide a superior rate of return compared to CDs and treasury bonds.
  • Split annuity strategies can replace CDs by replacing and enhancing the income through a SPIA, while the remaining principal grows back to the original sum in a fixed deferred annuity.
  • Annuity wealth transfer allows individuals who have had annuities for an extended period to use these annuities to fund a life insurance policy out of the High Net Worth client’s estate.
  • Using a fixed annuity to stretch out IRA distributions for multiple generations can help provide safety while maximizing benefits for parents and children.
  • Fixed and fixed index annuities may provide the security and financial comfort High Net Worth individuals seek when they retire and should be a part of each individual’s financial strategy.

Are Annuities Good for High-Net-Worth Individuals?

To address whether annuities are suitable for high-net-worth individuals, it’s crucial to understand their unique financial needs. High-net-worth investors typically have diverse investment portfolios. Adding an annuity into their portfolio can provide a steady and guaranteed income stream in retirement, thereby hedging against market risks.

Example: Imagine a wealthy investor with significant wealth invested in volatile assets like stocks. The investor’s wealth could take a severe hit if the stock market suffers a significant downturn. However, with a fixed annuity in their portfolio, they can enjoy a steady income, regardless of market fluctuations.

High Net Worth Individuals Use Annuities

Why the 1% Love Annuities

The 1%—the richest of the rich—have a unique perspective on annuities. For high-net-worth individuals, annuities offer a form of wealth transfer to heirs, a tax-advantaged investment option, and a safety net against other riskier investments. Furthermore, the guaranteed lifetime income provided by annuities ensures they can maintain their affluent lifestyle indefinitely.

Example: An annuity can serve as an efficient wealth transfer vehicle for a high-net-worth individual. Upon their demise, the remaining annuity can be directly transferred to their beneficiaries, often bypassing the probate process, saving time, and reducing legal fees.

Next Steps

In summary, while annuities might not be the first thing that comes to mind when we think about wealth and financial planning, they play a significant role in the portfolios of many high-net-worth individuals. Annuities can provide a safety net against market fluctuations, a guaranteed income in retirement, and potential tax benefits. Additionally, they can be a smart way to transfer wealth to the next generation.

Why High Net Worth Individuals Annuities

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Frequently Asked Questions

Why high net worth investors are paying more attention to annuities?

We use annuities primarily with wealthy clients to increase their comfort level with investing in equity.

Do millionaires use annuities?

Would you like to learn about how high-net-worth individuals utilize annuities? They use this financial tool for tax savings and estate planning. This guide will provide insight into some of the most prevalent reasons for their use.

Why the 1% love annuities?

Individuals in the top 1% income bracket often prefer to invest in annuities to minimize risk, as they already have a significant risk in their work and other investments. In addition, it’s worth noting that annuities are entirely protected from legal action and creditor claims in certain states, such as Florida and Texas.

Do the rich buy annuities?

Is it common for wealthy individuals to purchase annuities? While not all do, the number of wealthy individuals who purchase annuities has been increasing because they recognize that annuities are contracts that transfer risk and can protect them from creditors in many circumstances.

Why do so many experts consider annuities a win for retirees?

David Blanchett and Michael Finke wrote in a Think Advisor guide that annuities could lower the risk of outliving one’s savings and make it easier for retirees to spend their money without feeling anxious about their nest egg decreasing.

Are annuities suitable during high inflation?

Fixed annuities offer a steady return on investment without adjusting the income payments based on changes in the cost of living. However, it implies that the purchasing power of one’s retirement income may decrease over time due to inflation.

Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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