Annuities Explained

What is an Annuity? Annuities only come in two types, Fixed and variable. A fixed annuities are the most popular and kind of like a Bank CD and we will explain them here. The insurance company that issues the annuity agrees to pay a you fixed rate.The investment along with the fixed annuity's associated profit or loss is also the insurance company’s responsibility and right. The performance of the fixed annuity investment is not directly connected to the return the owner gets. The insurance company acts like kind of a go-between with the index and the fixed annuity owner. This helps to pass on a stable return to the annuity owner.

Variable annuities are simply investment accounts put together to form an "insurance product". The returns from variable annuities are usually directly related to the performance of the invested money from the insurance company. The difference is that the IRS allows tax deferred status on all contributions and gains in a variable annuity. We do not sell variable Annuities but wanted to explain them here.

The annuity contract holder has a right to annuitize ( or turn the investment into a lifetime stream of income, paid back to the owner or beneficiary in monthly installments by the insurance company ), a majority of annuity owners stay away from this aspect of annuities. The explanation is that this is mostly on account of the fact that the annuity's monthly payments are tied to the life of the owner. If you, the investor, dies early after annuitizing the annuity contract, the insurance company gets to keep the entire balance. We will ignore this aspect, and focus on the performance and tax issues related to a lump sum withdrawal.

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The company has the option to decide the credited rate, and very few companies pay an across the board rate to all fixed annuity holders. The actual amount the fixed annuity is credited with each year is actually calculated based on a set of factors including the pool of bonds assigned to the annuity and the purchase date.

If the end result is not what you would expected, and the annuity is not generating the kind of financial returns you had in mind, getting out can be difficult. The IRS charges a 10% penalty for early withdrawals. The issuing company may have its own rules and impose a charge of up to 8% to allow the transfer. Added to this is the fact that annuity returns are tied to the performing index. With fixed annuities, the situation is since you only face the prospect of penalties and administrative charges you can determine when is the best time to take out your money. Be sure the agent explains the annuity produce to you and discuss the charges.

Fixed Annuities are still a preferable investments for a certain set of owners. These include seniors who are looking for more returns than traditional investments offer, but do not want the associated risk. Secondly, since annuities offer protection against creditors, this may be a suitable savings tool for high risk professionals such as physicians who face malpractice suits. Also to be considered is the fact that traders on the stock market might to use annuities as a way to reduce the IRS tax burden.

The insurance company invests your funds in a bond portfolio, keeps a large portion of the returns and distributes the remaining to the contract holder. To see significant returns, investors need to wait for the duration. Short term gains are more likely to be accrued by directly investing in the market, rather than going through an annuity. Annuities offer the hope of satisfactory returns only in the long term.

There are also other options for your Annuity

Inflation Protection on Income Payments You may choose to keep all payments level if you wish. On the other hand, you may select at no additional charge an optional feature,  Inflation Protection. This feature automatically increases the amount of each payment by a specified percentage each year – 1%, 2%, 3% or 4%. The feature becomes effective when you begin to receive your annuity payments, may only be chosen when your contract is issued and may not be changed. The higher the annual percentage increase, the lower your initial payment will be.

Inflation Protection may help offset a future decline in your payments’ purchasing power caused by inflation. If you are considering adding this to your contract, you should weigh the trade-off of a smaller initial income amount in order to get increasing income over time.

Please contact us with any questions you may have at 866-392-INF0 (4636)