Since the introduction of variable or indexed annuities, which insurance companies introduced to compete with the growing popularity of mutual funds, annuity sales have risen steadily every year.  However, annuity sales have skyrocketed over the past year as a tidal wave of baby boomers are about to hit retirement age.

With life expectancies on the rise, there is a growing fear for many Americans that they will outlive the assets which they have accumulated over a lifetime.  There is also a lack of confidence in the Social Security system and it’s ability to remain solvent for more than another couple of decades, which is why they have grown popular even with the younger generations.  The decline in the stock market since the end of last summer has also played a major role in it’s rapid growth.

It is important to choose carefully which insurance company to purchase an annuity from.  As the current economic downturn has proven, even the insurance industry isn’t immune to losses.  Due to the open ended liabilities these type of financial products incur for insurance companies, financial strength should be a primary concern.

Different retirement strategies may offer the possibility of higher rates of return as well as similar tax benefits but none of them offer the type of guarantees which you can only find with annuities.  No other type of investment offers the ability to receive guaranteed income streams for the rest of your life.

Borrowing against a life insurance policy has grown very popular over the last decade but while there are a number of benefits to this strategy, there are also quite a few consequences as well.  Permanent or universal life insurance policies are made of two components, the death benefit or face value of the policy and the cash value or investment component.

The cash value component is considered an asset so you’re able to use it as collateral for a loan.  Insurance companies will usually let you borrow up to 90% of the cash value of your policy.  A bank can also be used for this as well if they are placed as the beneficiary for the loan amount.

The benefit of borrowing from your own policy is that there is no set repayment schedule so it can offer a lot more flexibility than a regular private loan.  The interest rate will also tend to be lower since there is practically no chance of default.

Theoretically it is possible to not have to pay the loan back until death but that is not recommended.  The loan amount will grow over time as interest is compounded and this is where the danger comes in.

In a bearish market like we currently have, it is quite possible for the loan amount to grow at a faster rate than the cash value component.  If the loan amount ever goes over the cash value amount, one of two things will happen.  Either the borrower pays the difference to the lender to keep the loan amount below the cash value component or the policy lapses.

If a policy is allowed to lapses, what happens is a cash surrender where the cash value amount is paid out, which can have significant tax implications.  Also the death benefit component will now be forfeit which is the main reason you buy insurance in the first place.

Let’s say that you have $100,000 in your cash value account and borrow $75,000 of it from your insurance company.  This doesn’t reduce the cash value component of the policy to $25,000 as the loan is not considered a withdrawal, it’s still at $100,000 and will continue to grow at a tax deferred rate..

Then let’s say you chose not to repay the loan and that eventually over time, both the loan amount and cash value have grown to $300,000 when the policy finally lapses.  The cash surrender value then becomes fully taxable as income by the IRS at whatever tax bracket you are in.

It is quite possible, if you are in a high enough tax bracket and if the loan was for a long enough duration, that the taxes owed may be more than the original amount borrowed.  So even though you only borrowed $75,000 initially, you will be responsible for paying taxes on the full $300,000 amount of the cash value component.

It is very important to talk to a credible financial planner and make an informed decision before entering into this type of loan agreement.

For the past few years the stock market and the rest of the economy have been on a nice little run but the good times may be over.  As every day passes the scope of the mortgage crisis seems to grow larger with even the federal government finally beginning to take notice.

Many analysts feel that we may be entering a period of increased volatility in the stock market.  Last month we saw large movement swings on a day to day basis with the overall outcome being the largest one month loss for the market in five years.  Credit concerns as well as volatility in the price of oil has Wall Street acting like a yo-yo.

This can have a large impact on your retirement planning and you should be concerned.  There are many different choices out there from mutual funds, life insurance, and annuities.  With the growing concern that the economy may be on a downward trend and its added elements of risk what you choose now could affect you for the rest of your life.

Should you go with a variable annuity and the possibility of higher returns or stick to the safe choice of a fixed annuity?  For the most part a variable annuity would act like a mutual fund in that it is a diversified portfolio with the stock market as it’s underlying investment.  A fixed annuity would be more like a diversified bond fund.

The variable annuity is a rather recent financial product that insurance companies came up with to combat the growing popularity of mutual funds.  In effect it’s almost like a microcosm of the mortgage market.  Fixed mortgages were around forever but then adjustable rate mortgages were introduced and became popular because of their so called “teaser” rates.

When the stock market was going up, the variable annuity seemed like the no-brainer but that’s not the case anymore.  Some people  may be wishing now that they had gone with the safe and steady fixed annuity and it’s guaranteed rate of return.  Kind of like the people with ARM’s that wish they had gone with a fixed mortgage and it’s set payment schedule.