You can invest your annuity in cryptocurrency now — but should you?

If you can weather the investment risk, an annuity is one way to get some exposure to cryptocurrency and defer taxes on the investment.

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Amanda ShihEditor & Licensed Life Insurance ExpertAmanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

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Life insurance and annuity company Federal Life recently announced a plan to allow investment advisors to allocate a portion of clients’ variable annuities in cryptocurrency. The option is currently limited to people who meet specific financial requirements. However, other annuity providers have expressed interest in developing similar offerings.

Investing in cryptocurrency is risky because the currency’s value fluctuates frequently; it isn’t the best option if you’re expecting predictable annuity payouts. But, there are potential upsides and considerations for people who can withstand significant volatility in their investments, such as high growth rarely found in stocks and bonds.

How the investment works

Federal Life’s new offering gives you the option to put a portion of your annuity into a portfolio largely invested in Bitcoin and Ether, among other cryptocurrency assets. Because of the potential for large gains and losses, the choice is only available to accredited investors — people or entities with a certain net worth, income, or professional financial licenses — who can bear significant financial risk.

This cryptocurrency-focused portfolio is offered as a private placement variable annuity, a type of tax-advantaged annuity available to wealthier people that’s often used for customized (and less predictable) investments. 

While a private placement annuity comes with tax advantages and cryptocurrency exchange largely happens outside of traditional financial systems, digital currency is still taxable. Work with your financial advisor to determine any personal tax implications.

Is it a good idea to invest your annuity in cryptocurrency?

Like other cryptocurrency investments, it’s too early to tell whether it’s a good choice for the average person’s annuity savings. For more experienced investors and wealthier people, the potential for major earnings may make it worth considering.

“Crypto can be really volatile,” says Zack Sigel, managing editor for personal finance at Policygenius. “So what might’ve been a $40,000 annuity payment one year might be a $60,000 annuity payment another year and a $20,000 payment the next.”

“But it’s hard to ignore that Bitcoin has more than quadrupled in value in just one year, and Ether has gone up 10 times in that same time. It’s virtually impossible to find those kinds of returns on the stock market.” 

However, the potential for dramatic upswings means there can also be dramatic downswings. What drives cryptocurrency value up or down is less predictable than your average stock — a tweet from Elon Musk in May 2021 caused Bitcoin prices to drop by more than half. 

“If your financial strategy relies on consistent payouts each year, then you may not want to rely on an asset that’s so sensitive,” says Sigel.

Who benefits from investing an annuity in cryptocurrency 

“Investing in cryptocurrency within an annuity can make sense if you're looking for tax deferral,” says Levi Sanchez, a certified financial planner and founder of Millennial Wealth LLC. “Since it's a highly speculative, but highly growth-oriented asset class, it can be extremely advantageous to purchase within a tax-advantaged account such as an annuity.” 

It also depends on your tolerance for investment risk. A cryptocurrency annuity option might make sense if you’re comfortable with some volatility in your accounts and want to put some of your annuity into a new type of asset without holding cryptocurrency yourself. 

Cryptocurrency enthusiasts may want to consider whether they’d like to pay their premiums with cryptocurrency and receive annuity funds in cryptocurrency. If so, ask your provider about your options before committing to an investment. 

As more traditional investment providers begin to explore digital currency options for customers, wealthy people will be able to diversify their retirement and savings portfolios. Everyday investors with less appetite for financial risk may want to stick to more traditional options.

Image: Lambert / Getty Images