Types of Annuities
An annuity is a contract between a purchaser and an insurance
company that offers protection against outliving one's income. Annuities and CDs have
several important differences. Certificates of Deposits are FDIC insured, annuities are
not. The principal of an annuity is guaranteed by the underwriting insurer.
Unlike CDs, annuities have the added advantage of earning tax-deferred interest. That is,
the interest you earn accumulates on a tax-deferred basis. You don't pay income tax on
your money until you receive it. Depending on how you withdraw the money, the tax savings
could be significant.
Unlike life insurance policies, annuities are designed to provide income for retirement
rather than passing money on to your estate. However, annuities can be structured to
provide a death benefit to your beneficiary without going through probate.
Annuities are either qualified or nonqualified. Qualified
annuities are generally purchased with pre-tax dollars. These annuities generally are
Individual Retirement Annuities (IRAs) and may be tax deductible under certain eligibility
guidelines and the interest you earn accumulates, tax-deferred. However, the money you
withdraw or receive is subject to income taxes. (Withdrawals made prior to age 59 1/2 may
be subject to a 10 percent IRS penalty tax. Withdrawals may be subject to surrender
charges.) Most annuity contracts are long-term plans designed to provide you with
retirement income. To encourage long-term accumulation, most contracts charge surrender
fees if you cancel your contract. Typical surrender charges decline to zero percent over a
period of time.
When you're ready to receive your retirement income, you will have the option of
"annuitizing" your contract. Annuitizing means that you choose to receive your
money in a series of equal payments -- monthly, quarterly, semi-annually, or annually.
Payments can be structured to last for your lifetime or for the combination of two lives
-- you and your spouse -- or for a specific period of time. Some annuities even allow you
to systematically withdraw money without having to annuitize the contract.
Deferred vs. Immediate vs. Variable
DEFERRED ANNUITY
A deferred annuity is an insurance contract or agreement to pay an amount of
money at regular intervals at some time in the future. But not everybody knows how it
really works. Here are some of the ins and outs:
 | Deferred annuities can be qualified or nonqualified. Qualified annuities are purchased with pre-tax money and are generally Individual Retirement Accounts (IRAs), Rollover IRAs, or Tax-Deferred Annuities (TDAs). Nonqualified annuities are purchased with money you've already paid taxes on. But the interest you earn is still not taxed until you receive it. |
| A deferred annuity may be a single premium or a flexible premium. You purchase a single-premium deferred annuity with one lump sum, and you can't make additional contributions. A flexible premium deferred annuity is just that - flexible. You can add additional money to this type of annuity. |
| Tax-Deferred Interest - You generally purchase a deferred annuity with a lump sum or a series of payments, earning interest on your payment(s). The interest you receive accumulates on a tax-deferred basis until you take the money out. Withdrawals made prior to age 59½ may be subject to ten percent IRS penalty tax. |
| Charges - Some deferred annuities charge an annual administrative fee. Most have surrender charges which apply if you cancel your contract or withdraw a large portion during a set period of years at the beginning of the contract. Surrender charges are generally a percentage of the amount surrendered and usually decline to zero over a period of time (usually six to 10 years). |
| Annuitizing - When you want to receive income, you can annuitize your deferred contract and receive your money in a series of payments. You can arrange to be paid monthly, quarterly, semiannually or annually. The amount you receive depends on your account value and the payment option you select. |
IMMEDIATE ANNUITIES
An immediate annuity is purchased with a single lump sum of money and you start
receiving income right away. You can generally choose a guaranteed income for your life or
the joint lifetimes of you and your spouse. You can also receive income for a specified
period of time. Payments are flexible to meet your needs and income can be paid monthly,
quarterly, semi-annually or annually.
An immediate annuity provides a comfortable security blanket. It's for those who are
looking for a guaranteed, reliable source of income. Other options (CDs, or mutual funds)
provide more liquidity,however changes in interest rates or market conditions can cause an
unplanned cut in the monthly income. Certificates of Deposits are FDIC insured,
annuities are not. The principal of an annuity is guaranteed by the underwriting company.
You can choose from several different income payment options. Some of the most common
include: life income .. equal payments are made to you throughout your life; fixed period
.. you choose the period of time that meets your needs; and joint and survivor life income
.. you and your spouse both receive guaranteed payments for life.
If you decide on an immediate annuity, a few things to look for include: a financially
strong company; no annual administration fees; convenient options like automatic deposit;
and payment options that fit your needs.
If you decide an immediate annuity is for you, a few things to look for include: a
financially strong company; no annual administration fees; convenient options like
automatic deposit; and payment options that fit your needs.
An immediate annuity is purchased with a single lump sum of money and you start receiving
income right away. You can generally choose a guaranteed income for your life or the joint
lifetimes of you and your spouse. You can also receive income for a specified period of
time. Payments are flexible to meet your needs and income can be paid monthly, quarterly,
semi-annually or annually.
VARIABLE ANNUITIES
The variable annuity crosses traditional life insurance and investment lines by
offering tax-deferred investment divisions and insurance benefits. One of the available
payout options includes a guaranteed income which cannot be outlived. Such guarantees are
backed by the claims-paying ability of the underwriting insurance company.
Whether you're a novice or seasoned investor, the variable annuity can meet a variety of
needs. An array of options lets you choose among different separate account investment
divisions. Each division has a unique investment objective. Select those which match your
own needs and investment attitudes. Plus, you can transfer your money among these
divisions without tax consequences.
Any plan for retirement must include the ability to put large and small contributions to
work for you. Variable annuities accommodate both large payments of money and smaller
systematic contributions.
This flexibility provides the discipline of regular contributions and the instant benefit
of large contributions. With the chance of higher taxes on the horizon, variable annuities
can help by funding both a qualified retirement plan (meaning the amount invested is
usually tax deductible the year it is invested, and its earnings grow tax-deferred) and a
nonqualified retirement plan. Nonqualified plans allow investment earnings to grow
tax-deferred until withdrawn. Examples of qualified plans are an Individual Retirement
Account (IRA), a Simplified Employee Pension (SEP) Plan and a Savings Incentive Match Plan
for Employees (SIMPLE IRA).
Before you look into the different options offered by a variable annuity, it's best to
seek a strong company and an investment manager with a solid track record and experience.
With respect to product features that are guaranteed, you want the insurer offering the
annuity to have reliable claims paying ability with a history of strong ratings from
agencies like A.M. Best, Standard & Poor's, Moody's, or Duff & Phelps. (These
ratings do not apply to the separate accounts funding the annuity's investment divisions.)
As you consider variable annuity options, be sure to choose investment divisions based on
your own risk tolerance. Conservative to aggressive variable divisions are available,
including a variety of stock and bond portfolios, and minimum-guaranteed return accounts
often are an option. Any variable annuity investor should heed this advice, however:
variable annuities are not for the short-term investor. This product is designed for the
long-term.
Even though it is a long-term investment, a variable annuity can offer you control of your
assets. As your needs and financial objectives change, you can transfer assets among the
various investment options (subject to some limitations), without charges or tax
consequences. Many variable annuities contain a feature that allows you to automatically
rebalance amounts among investment divisions to maintain the investment allocation with
which you are most comfortable. With several payout options available, you can receive
retirement income in a form that meets your personal needs.
A variable annuity is a contract for life. Conventional wisdom suggests that young
investors should invest a higher percent of their assets in risk-oriented accounts and
transition to fixed accounts as they near retirement. This is called "life-cycle
investing." Another attractive option for investors is the ability to allocate assets
based on the investment environment. Dollar cost averaging enables investors to take
advantage of market fluctuations. Dollar cost averaging does not assure a profit nor
protect against loss in declining markets. Such plans involve continuous investment
regardless of fluctuating prices, so investors should consider their ability to continue
purchases through periods of low price levels.
Portions of your invested dollars can be withdrawn, before selecting an income option,
within certain guidelines as described in the annuity's contract or prospectus. These
legal documents and your financial representative or professional can answer any questions
you may have concerning the many features and benefits of a variable annuity. Withdrawals
made prior to age 59 1/2 may be subject to a 10% IRS tax penalty. In addition, surrender
charges may apply to withdrawals.
Variable annuities offer you an affordable, flexible way to save money for retirement.
Because of heightened awareness of the advantages of saving today for tomorrow's
retirement needs, investors of all ages choose variable annuities as attractive investment
options. Values in the separate account divisions are not guaranteed and will vary from
day to day. For more information about this and other financial topics, contact me.
When you're ready to receive your retirement income, you will have the option of
"annuitizing" your contract. Annuitizing means that you choose to receive your
money in a series of equal payments -- monthly, quarterly, semi-annually, or annually.
Payments can be structured to last for your lifetime or for the combination of two lives
-- you and your spouse -- or for a specific period of time. Some annuities even allow you
to systematically withdraw money without having to annuitize the contract.
