5 Annuity Strategies For High Net Worth Individuals

Most people who own annuities are middle class. Seventy percent of annuity owners had total annual household incomes under $100,000 with a median annual household income of $79,000, according to The Survey of Owners of Individual Annuity Contracts, conducted by Gallup in 2022, the most recent year available.

While many annuity owners are solidly middle class, high-net worth people buy annuities, too. Mostly, they do so for the same reasons anyone else would: Guaranteed income for life, protection from market volatility and peace of mind in retirement.

With an annuity, you hand over a lump sum or series of payments to an insurance company, and in exchange, the insurer promises a series of payments to you either now or in the future. They’re often described as self-funded pensions.

For those with high income and significant assets, annuities can play a more nuanced role in a larger wealth strategy — especially in the areas of tax planning, estate planning and asset protection. They can generate tax-deferred growth with no annual IRS contribution limits, shield assets from creditors and ensure a surviving spouse receives stable, long-term income.

Here are several ways high-net worth individuals can use annuities strategically — and when you might be better off exploring other options.

1. Tax-deferred growth

Once you’ve contributed the maximum to your 401(k), IRA, HSA and other tax-advantaged accounts, there aren’t many places left to park money where it can grow tax-deferred.

Additional funds are usually funneled into taxable brokerage accounts, but this can create a growing annual tax bill on interest, dividends and potentially capital gains.

A nonqualified annuity — that is, one purchased outside a tax-advantaged retirement plan — can step in to fill that gap. They allow gains to grow tax-deferred and there’s no annual IRS contribution caps. Insurance companies may cap how much you can contribute to a contract, but these limits are generally quite high, often ranging between $1 million and $3 million.

However, keep in mind gains are subject to ordinary income tax when funds are withdrawn or payouts begin. If funds are accessed prior to age 59 ½, a 10 percent penalty from the IRS also applies.

One option is a multi-year guaranteed annuity (MYGA), which functions like a CD but with tax deferral. Instead of receiving and paying tax on interest annually, you can delay taxation until the end of the term — potentially timing that income to land in a lower tax bracket.

Variable and indexed annuities also offer tax deferral, although they come with market risk and higher fees. Still, for high earners looking to shelter additional growth outside retirement accounts, nonqualified annuities can be a potential option.

2. Income protection for a spouse

In many relationships, one spouse takes the lead in managing investments and financial decisions. But if that person dies first, the surviving spouse may be left with a complex portfolio and little experience managing it.

By choosing a joint life annuity, you can ensure payments continue for as long as either spouse is alive. It can help reduce the burden of financial decision-making for the survivor during an otherwise overwhelming transition.

Of course, a life insurance policy can also provide for your spouse after you’re gone, but annuities offer a distinct advantage over a lump sum life insurance payout, says Willie Jones, managing director of member success at DPL Financial Partners, an online annuities marketplace for fee-only advisors.

“Only annuities can set up a guaranteed income stream for the rest of their life,” says Jones. “You can set up an annuity that covers at least their basic expenses for life, and have that built-in peace of mind.”

3. Protection from creditors and bankruptcy

In several states — including Florida, Texas and New York — annuities offer strong protection from creditors. That means if you’re sued or face bankruptcy, the cash value and income stream from your annuity are generally off-limits.

Take Florida, for example. Under Section 222.14 of the Florida Statutes, the proceeds of annuity contracts issued to Florida residents “shall not in any case be liable to attachment, garnishment or legal process” in favor of any creditor.

This makes annuities a practical asset protection tool, especially for individuals with high legal risks and high incomes, such as physicians, business owners and real estate investors.

It’s important to note that protections vary by state and annuities shouldn’t be relied on as a standalone solution to asset protection — or used for nefarious means. Annuities tend to work best as one component of a layered approach that might also include things like umbrella insurance, trusts and business entity structures.

4. Buying an annuity for your child

For high-net-worth individuals, buying an annuity for a child or grandchild can be a strategic way to lock in long-term financial security for the next generation.

It’s a relatively low-maintenance way to transfer wealth, especially if you’re wary of giving a lump sum to someone who may not manage it wisely. Compared to a spendthrift trust, an annuity can be a simpler, lower-cost way to create a lifetime income stream for an heir.

A deferred annuity can gradually grow in value over time, for example, and eventually convert into monthly or annual payments for the beneficiary.

But annuities are a long-term commitment. Once locked in, contracts are difficult to unwind without penalties. Fixed payments also may not keep pace with inflation, and your child’s needs or your own financial goals could evolve over time. So, while annuities can be a powerful planning tool, they’re best used as one part of a broader strategy.

5. Stretching an inheritance

Before 2020, wealthy families could rely on a “stretch IRA” strategy to pass wealth to the next generation in a tax-efficient way. Under the old rules, non-spouse beneficiaries could take required minimum distributions (RMDs) over their own life expectancy, allowing the assets to grow tax-deferred for decades.

The Secure Act of 2019 largely eliminated that strategy. Now, most non-spouse beneficiaries must liquidate inherited IRAs within 10 years, which shortens the window of compounded growth and often results in higher tax bills for heirs.

However, nonqualified annuities aren’t subject to the same rule. Beneficiaries still get the option to extend their withdrawals over their own life expectancy. This “stretch” provision spreads out taxes over a longer window while keeping assets invested.

Non-spousal beneficiaries have one year from the owner’s date of death to establish and begin receiving their annuity distributions. Miss that deadline, and a shorter five-year rule automatically applies.

“If you don’t make the decision quickly, the decision is made for you,” says Jones.

Why annuities don’t make sense for every portfolio

Despite the opportunities, annuities don’t belong in every portfolio. In fact, they often don’t make much sense for those at either end of the wealth spectrum — the ultra wealthy and lower-income households.

For individuals with $30 million or more in assets, the core benefit of an annuity — guaranteed income — may be irrelevant. With ample cash flow and a myriad of assets, they can likely self-insure against market volatility and longevity risk. For this group, the relatively modest monthly income may simply not feel worth it.

On the other end of the spectrum, individuals with limited assets or income may find annuities too expensive and restrictive. Many types of annuities require a sizable upfront investment, often $10,000 or more. And to generate any sort of meaningful monthly income in retirement, you’ll likely need to put down much more than that — think $100,000 and up.

That’s capital some households simply can’t afford to tie up, especially if access to emergency funds is a more pressing priority. And once money goes into an annuity, it can be hard to get out without facing surrender charges and/or tax penalties. For someone without much financial cushion, that loss of flexibility can be risky.

Generally, the most appropriate use cases for annuities tend to fall somewhere in the middle. They can be a powerful tool for what’s known as mass affluent households — people with assets ranging between $100,000 and $500,000 — who want to lock in future income, manage taxes or diversify their broader portfolio.

So while billionaires might not view annuities as a go-to financial product, annuities can still fill important gaps for high-net worth clients that traditional investment accounts and retirement plans don’t cover.

Bottom line

Ultimately, annuities are best viewed as one option in a toolkit — not a one-size-fits-all solution. When structured intentionally, they can defer taxes, safeguard wealth and create a predictable income stream. The key is to match the product with your specific need. Don’t base your decision on income or net worth alone, but instead on your goals, risk tolerance and how much control you want over your money.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.