If you're serious about retirement planning, you'll be investing for decades. That's lots of time to learn about investments and retirement planning, and the more you learn the less likely you are to make mistakes. This is especially true of annuities, which have a number of unusual characteristics because of their heritage in the insurance industry. They offer a wide range of options for use in specific situations, such as special balloon annuities.
An annuity is a sort of mutated life insurance policy, with its primary purpose redirected to providing a lifetime income. For retirement planning purposes, the usual procedure is to pay into the plan for an extended period of time, then convert the accumulated investment into a retirement income. However, annuities can also be purchased with a lump sum of money, and their funds can be disbursed in the same way.
A balloon annuity blends those two approaches. It pays a minimal amount for a set period of time, and then all the annuity's remaining capital and gains in one lump sum during the last month of the contract. The primary benefit of a balloon annuity is that it can make a large portion of your assets "disappear" overnight, turning a large quantity of money into a very small income. This means surrendering the use of your money until the end of the term, but it's a useful -- if desperate -- strategy when you're disqualified from an aid program because your assets are too high.
Using a Balloon Annuity
For example, if your dependent parent's assets were too high to qualify for veteran's benefits, you might employ a balloon annuity to remove those assets from the picture temporarily. The money remains in the annuity for a predetermined period of time, eventually paying out to your parent or a named beneficiary, if your parent dies in the interim. This can prevent the estate from being consumed by a need for ongoing care, leaving your parent destitute.
There are two primary risks you run by using this strategy. By tying up the money, you make it inaccessible for emergencies or changes in your circumstances. Many of these contracts contain a provision for converting the balloon annuity to a standard form, using the funds instead to provide a more realistic income. The second risk is that the applicable legislation could change because balloon annuities are sometimes open to abuse. For example, affluent families might use one to avoid paying medical expenses they could legitimately afford. This can result in your balloon annuity becoming grounds for disqualification from a benefits program.
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- The Elder Law Office of Steven C. Perlis and Associates: Lump Sum Balloon Annuities No Longer Allowed for Persons Sseeking to Go Onto Medicaid
- Texas Department of Insurance: Understanding Annuities
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