Do the benefits of the new annuity, such as a higher interest rate or more flexibility, offset the withdrawal charges?
- If a client decides to switch annuities, be sure to use federal tax form 1035, which avoids both income tax and the IRS penalty for early withdrawals by allowing for tax- free exchanges.
- Variable annuities are subject to market risks; investors can lose earnings and principal. If a guarantee of principal and/or earnings is needed, fixed annuities or the fixed-interest options of variable annuities may be more suitable.
- Annuities have drawbacks when it comes to tax control. If the owner dies while the annuity is accumulating, all deferred taxes on the contract's growth become due, reducing the annuity's value.
- Although annuities can be useful in certain situations, they can also be detrimental. Typically, the sales agent is also the one doing the analysis for potential buyers. Thus, annuities may tend to be sold as products rather than a means of meeting the investor's needs.
- Many companies pay high commissions for annuity sales. If the same investor bought commissionable mutual funds, depending on the investment, he or she probably would pay less.
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