Annuities
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Annuities Information
What is an annuity?
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Annuities have been in existence for well over two hundred years. The very first mention of Annuities in the United States was the use of these products by the Presbyterian Church in 1740 to provide security for the clergy and widows. Annuities allow you to accumulate tax-deferred funds for retirement and then, if you desire, receive a guaranteed income (this process is called Annuitization) payable for life or for a specified period of time: generally a term of five or ten years.
Annuities are offered by Insurance companies and sold through licensed agents. The insurance company must be evaluated and licensed in your state as does the agent. State insurance commissions scrutinize Insurance companies to ensure they have reserve funds, commonly referred to as State Legal Reserve Pools, in place to protect investors before granting insurance companies licenses. If an insurance company goes out of business other insurance companies licensed in state must assume bankrupt insurers obligations and liabilities. Note that this protection protects fixed-rate annuity holders only, with some protection afforded to variable annuity owners.
Annuities are very similar to CDs offered by banks. Just like banks insurance companies offer different rates and returns on annuity investments.
Advantages of Annuities:
All annuities have three primary advantages: Tax Deferral, Avoidance of Probate, and a Guaranteed Income (optional) for a fixed period of time, or income for life.
More specific reasons to invest in fixed and immediate annuities:
- You need to safely create wealth for your heirs
- You need tax-deferred growth
- You need your principal and interest guaranteed
- You need your heirs to avoid probate upon your death
- You need an increased death benefit
- You need stock-market linked gains without the downside risk
- You have money that is designated for inheritance
- You do not need more than 10% liquidity annually
Different types of annuities
Immediate Annuities
Immediate annuities are annuities designed to pay owners a determined amount of money on a monthly, quarterly, annual or semi-annual basis. The rate for an immediate annuity can be fixed-rate or variable-rate. The fixed will guarantee you a set income that will not fluctuate, whereas the variable option will fluctuate with performance of selected investments your variable annuity is based on. The amount you receive will depend on initial premium deposit, the length of time (term) of your annuity and the guarantees set forth by the particular insurer.
Fixed Annuities
Fixed annuities are characterized by a minimum interest rate guaranteed by the issuing insurance company. Typically, a minimum annuity benefit is also guaranteed. With a fixed annuity, the focus is on safety of principal and stable investment returns. The fixed-rate annuity is very similar to a bank CD, but typically pays a higher minimum interest rate and offer greater security. You receive this amount no matter if the market goes down, interest rates decline or the insurer has an unprofitable year. They are a secure and safe, no-risk investment which makes them popular with conservative investors and for those who want to pinpoint exact returns on their investments.
Equity Indexed Annuities
Equity Indexed Annuities (EIAs) are characterized by a contract return that is the greater of an annual minimum rate (typically 3%) or the turn from a stock market index, such as the Standard & Poor’s 500 index, reduced by certain expenses and formulas. If the chosen index rises sufficiently during a specific period, a greater return is credited to the contract owner’s account for that period. If the stock market index does not rise sufficiently, or even declines, the lower minimum rate is credited. An owner is guaranteed to receive back at least all principal, if an EIA contract is held for a minimum period of time.
Variable Annuities
Variable annuities allow the owner to invest their annuity premium in any way they see fit. The insurance company does not share in profits of investments or protect losses. They carry the same risks as individual stocks, bonds or mutual funds. If the securities the Annuity is based on go up 20% for example, you keep all gains, if the investments decline 20% you must take the loss. Variable annuities afford flexibility, allowing investors to invest simultaneously across a wide array of securities: bonds, mutual funds, stocks, futures, etc. They are designed for more aggressive investors who desire investment flexibility.
What Type of Annuity Fits You?
All annuity types have their pros and cons. Flexibility, security and risk aversion are some of the general advantages of annuities. There are also more complex tax benefits that can be obtained with investing in an annuity as well. The right choice depends on investors and their current needs and portfolios.
General benefits to help guide your decision:
Fixed deferred annuities make sense if you:
Desire the security and safety of a guaranteed interest rate
Want tax deferral advantages
Have considerable assets to set aside for at least five years
Are looking to potentially convert into a future income
Are saving for retirement
Variable annuities make sense if you:
Want gains of potential market growth
Have significant assets to set aside for 10 years or more
Want tax deferral advantages
Are looking to potentially convert into a future income
Are saving for retirement
Income annuities make sense if you:
Are in retirement or are entering retirement
Desire a guaranteed retirement income
Have a rollover or lump sum to convert into an income stream
Have concerns about outliving your income
ANNUITY ACCUMULATION PHASE OR PERIOD
The period during which the owner of a deferred annuity makes payments to build up assets.
ANNUITY ADMINISTRATIVE CHARGES
Covers the cost of customer services for owners of variable annuities.
ANNUITY BENEFICIARY
In certain types of annuities, a person who receives annuity contract payments if the annuity owner or annuitant dies while payments are still due.
ANNUITY CONTRACT
An agreement similar to an insurance policy for other insurance products such as auto insurance.
ANNUITY CONTRACT OWNER
The person or entity that purchases an annuity and has all rights to the contract. Usually, but not always, the annuitant (the person who receives incomes from the contract).
ANNUITY DEATH BENEFITS
The guarantee that if an annuity contract owner dies before annuitization (the switchover from the savings to the payment phase) the beneficiary will receive the value of the annuity that is due.
ANNUITY INSURANCE CHARGES
Covers administrative and mortality and expense risk costs.
ANNUITY INVESTMENT MANAGEMENT FEE
The fee paid for the management of variable annuity invested assets.
ANNUITY ISSUER
The insurance company that issues the annuity.
ANNUITY PROSPECTUS
Legal document providing detailed information about variable annuity contracts. Must be offered to each prospective buyer.
ANNUITY PURCHASE RATE
The cost of an annuity based on such factors as the age and gender of the contract owner
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