Can a Business Own an Annuity?

Small business owners may choose to purchase annuities in order to benefit their business with tax savings and retain talented employees by providing retirement plan options.

An annuity, which is a financial product sold be an insurance company, can offer a guaranteed stream of income, options to make tax-deferred contributions and beneficiary provisions.

Annuities may be owned by either an adult or a legal entity, qualifying an individual, couple, partnership, trust or business to be the owner. The owner controls the investment and may give all or parts of the contract to individuals or entities.  As such, small business owners may purchase their own annuity or an annuity for their business. 

Before committing to an annuity contract, evaluate the needs of your business and chose a plan that will benefit both you and your employees.

Evaluate Options

There are a variety of retirement plans that can be beneficial to a small business, including different types of annuities, each with its own features and limitations.

A small business owner may choose an annuity over an individual 401(k) plan. Setting up a 401(k) would legally require the company to offer 401(k) privileges to all employees, which can result in major expenses that are difficult for smaller companies to manage. Additionally, employees may benefit from an annuity plan, as 401(k) benefits may be lost with a job change.

A group annuity may be purchased to fund Individual Retirement Accounts (IRAs) for a business' employees. Small business owners can purchase these annuities, which can be used to create a Savings Incentive Match Plan (SIMPLE-IRA) or Simplified Pension Plan (SEP-IRA). The SIMPLE-IRA and the SEP-IRA have specific requirements regarding both minimum and maximum contributions, and should be researched thoroughly before choosing one plan over the other.

Single- and multiple-premium annuities share similar features, whether for an individual or a business. Both begin with payments during the accumulation phase and are followed with a lump sum or series of payments in the payout phase. One major difference is that the business-owned annuity does not have the same tax benefits on the interest it earns as an individually owned annuity.

A Word of Caution

Investigate the company selling the annuity. Because the annuity will be paid through the insurance company, you want to make sure it is a reputable company with a good safety profile. Use agencies such as Moody's or AM Best to check the credibility of the insurance company.

Pay attention to the underwriting of the contract. You want to avoid being surprised later on by unexpected expenses or penalties. For example, if you decide to sell part of the annuity because you want immediate access to your retirement fund, there will be specific costs associated with the expedited process.

Choosing an annuity plan can be an affordable way to provide for your employees’ long-term needs. The contributions for certain plans are a tax-deductible business expense, and an employee takes a share of the annuity when they retire. But do your research first; it will pay off big time.

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