Are Annuities Really as Safe as They Sound?
If someone called and said, “Doug, I heard annuities are amazing. Can you sell me one?” I’d probably smile and say, “Let’s take a closer look first.” Annuities often sound like the perfect solution: you give an insurance company a lump sum, and they promise a steady paycheck for life. For someone living in Israel who wants predictable income, that can sound like peace of mind in a contract. But as with most things in finance, the details matter. And those details can change the story entirely.
What an Annuity Actually Is
At its core, an annuity is a contract with an insurance company. You give the insurer money, either all at once or over time, and in return receive income later on. There are two main types: immediate annuities, which start paying right away, and deferred annuities, which begin later, often at retirement.
On paper, that seems simple. In practice, annuities come with pages of fine print and a maze of fees that can quietly reduce their appeal.
Fixed vs. Variable: A Tale of Two Promises
A fixed annuity behaves a little bit like a CD or bond. It pays a predictable interest rate, say, two or three percent a year, for a set period. The rate won’t go up, but it won’t go down either.
A variable annuity, on the other hand, is tied to the markets. If markets rise, the account may grow. If they fall, the value can drop. Some policies offer a “guarantee” that heirs will receive at least the original investment if the owner dies. That sounds comforting, but the guarantee usually applies only upon death. Not if the owner needs to cash out while alive.
That’s where confusion creeps in. Many buyers assume “guaranteed” means “no risk.” It doesn’t. The guarantee is only as good as the insurance company providing it, and insurance companies are not backed by FDIC protection like bank deposits are.
The Hidden Costs of Security
For Americans living in Israel, the tax picture adds a whole new layer of complexity. A U.S. annuity might have tax advantages in America, but that doesn’t mean Israel recognizes them.
If an American buys an Israeli insurance product that behaves like a variable annuity, the I.R.S. may classify it as a PFIC; a Passive Foreign Investment Company. That label often means higher taxes and more reporting. Even without double taxation, the paperwork alone can be a headache. And the reverse is also true: Israeli residents who own U.S. annuities may face unexpected tax treatment at home.
Tax Traps for Cross-Border Investors
For Americans living in Israel, the tax picture adds a whole new layer of complexity. A U.S. annuity might have tax advantages in America, but that doesn’t mean Israel recognizes them.
If an American buys an Israeli insurance product that behaves like a variable annuity, the I.R.S. may classify it as a PFIC; a Passive Foreign Investment Company. That label often means higher taxes and more reporting. Even without double taxation, the paperwork alone can be a headache. And the reverse is also true: Israeli residents who own U.S. annuities may face unexpected tax treatment at home.
What Happens When You’re Gone
Estate planning adds another wrinkle. Passing on an annuity can be far more complicated than transferring a simple brokerage account. Beneficiary rules, payout timing, and cross-border reporting can all trip up heirs who are already dealing with enough.
When an Annuity Might Make Sense
To be fair, annuities aren’t always the wrong choice. In a few specific cases, such as when someone values predictable income over growth potential, annuities can fit. But for most cross-border investors, the mix of high fees, limited access, and tax uncertainty makes them less appealing.
A well-structured plan using U.S.-based accounts, diversified investments, and a thoughtful withdrawal strategy can often provide similar stability with more flexibility.
Key Questions to Ask Before Buying
Before signing anything, it’s worth asking:
- What exactly is guaranteed, and under what conditions?
- How long is the surrender period?
- What are all the fees, including riders and hidden costs?
- How will the policy be taxed in both the U.S. and Israel?
If those answers aren’t clear, it’s best to pause and get professional advice first.
The Bottom Line
Peace of mind doesn’t come from a product; it comes from understanding. A balanced plan that blends steady income sources, cash reserves, and long-term investments can help create stability without unnecessary complexity.
Note: This article is for educational purposes only and is not intended as financial, legal, or tax advice. Everyone’s situation is unique, and professional guidance is recommended before making investment decisions.
If you’re considering an annuity or want to review a cross-border investment plan, set up a free Cross-Border Financial Evaluation at profile-financial.com/call. Together, we’ll explore the options, assess the risks, and build a flexible plan designed to adapt as life unfolds.
