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Deferred Fixed Annuities
People are living longer and that means more time and savings will be spent in retirement. If you need a tax-deferred investment to provide guaranteed income for life or a specified number of years in the future, an annuity may be worth considering.
A deferred fixed annuity pays a guaranteed rate of return on the investment during the accumulation phase. A stream of guaranteed income is paid during the income phase based on the value of the annuity.
A deferred fixed annuity is a long term investment designed to accumulate assets for retirement. It also offers the ability to turn those assets into a  predictable stream of income at some point in the future. You decide when your deferred fixed annuity payments begin and how long to receive income.
Deferred Fixed Annuities are not appropriate for everyone. There are fees and charges associated with owning an annuity. Annuities do not provide any additional tax advantage when used to fund a qualified plan. Investors should consider buying an annuity to fund a qualified plan for the annuity's additional features, such as lifetime income payments and death benefit protection.
How do I know if a fixed deferred annuity is right for me?
T he questions listed below may help you decide which type of annuity, if any, meets your retirement planning and financial needs. You should think about what your goals are for the money you may put into the annuity. You need to think about how much risk you’re willing to take with the money.
As k yourself:
• H ow much retirement income will I need in addition to what I will get from Social Security and my pension?
• W ill I need that additional income only for myself or for myself and someone else?
• H ow long can I leave my money in the annuity?
• W hen will I need income payments?
• D oes the annuity let me get money when I need it?
• D o I want a fixed annuity with a guaranteed interest rate and little or no risk of losing the principal?
• D o I want a variable annuity with the potential for higher earnings that aren’t guaranteed and the possibility that I may risk losing principal?
• O r, am I somewhere in between and willing to take some risks with an equity-indexed annuity?
• H ow much can I afford to pay in premium?
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How are the interest rates set for my fixed deferred annuity?
D uring the accumulation period, your money (less any applicable charges) earns interest at rates that change from time to time. Usually, what these rates will be is entirely up to the insurance company.
C urrent Interest Rate
T he current rate is the rate the company decides to credit to your contract at a particular time. The company will guarantee it will not change for some time period.
• T he initial rate is an interest rate the insurance company may credit for a set period of time after you first buy your annuity. The initial rate in some contracts may be higher than it will be later. This is often called a bonus rate.
• T he renewal rate is the rate credited by the company after the end of the set time period. The contract tells how the company will set the renewal rate, which may be tied to an external reference or index.
Mi nimum Guaranteed Rate
T he minimum guaranteed interest rate is the lowest rate your annuity will earn. This rate may vary by state and is stated in the contract.
M ultiple Interest Rates
Some annuity contracts apply different interest rates to each premium you pay or to premiums you pay during different time periods. Other annuity contracts may have two or more accumulated values that fund different benefit choices. These accumulated values may use different interest rates. You get only one of the accumulated values depending on which benefit you choose.
What charges may be subtracted from my fixed deferred annuity?
Most annuities ha ve charges related to the cost of selling or servicing it. These charges may be subtracted directly from the contract value. Ask your agent or the company to describe the charges that apply to your annuity. Some examples of charges, fees and taxes are:
S urrender Charges
If you need access to your money, you may be able to take all or part of the value out of your annuity at any time during the accumulation period. If you take out part of the value, you may pay a surrender charge. If you take out all of the value and surrender, or terminate, the annuity, you may pay a surrender charge. In either case, the company may figure the charge as a percentage of the value of the contract, of the premiums you’ve paid or of the amount you’re liquidating. The company may reduce or even eliminate the surrender charge after you’ve had the contract for a stated number of years. A company may waive the surrender charge when it pays a death benefit.
Some annuities have stated terms. When the term is up, the contract may automatically expire or renew. You’re usually given a short period of time, called a window, to decide if you want to renew or surrender the annuity. If you surrender during the window, you won’t have to pay surrender charges. If you renew, the surrender charges may start over.
In some annuities, there is no charge if you surrender your contract when the company’s current interest rate falls below a certain level. This may be called a bailout option.
In a multiple premium annuity, the surrender charge may apply to each premium paid for a certain period of time. This may be called a rolling surrender charge.
Some annuity contracts have a market value adjustment feature. If interestrates are different when you surrender your annuity than when you bought it, a market value adjustment (MVA) may make the cash surrender value higher or lower than the accumulated value. Since you and the insurance company share this risk, an annuity with a MVA feature may credit a higher rate than an annuity without that feature.
B e sure to read the tax treatment section and ask your tax advisor for information about possible tax penalties on surrenders.
Surrender rights
Most annuities allow you to surrender your contract if income payments ha ve not yet started. Upon surrender, the contract terminates. The surrender value is equal to your contract value less the surrender charge or prior distribution, if any. This amount could be less than you paid in. Many annuities also provide that you may liquidate a portion of your contract value, under certain conditions, without terminating the contract. A charge may be deducted from the amount liquidated.
T his charge is usually a percentage of either the accumulated value of the contract, the premiums paid or the portion liquidated. There may be certain tax penalties for early surrenders. Be sure you understand any tax implications before surrendering an annuity contract.
F ree Distribution
Y our annuity may have a limited free distribution feature, which lets you take one or more distributions without a charge. The size of the free distribution is often limited to a set percentage of your contract value or premium. If you take a larger distribution, you may pay surrender charges. You may lose earnings above the minimum guaranteed rate on the amount distributed. Some annuities waive surrender charges in certain situations, such as death, confinement in a nursing home or terminal illness.
Li quidated earnings are subject to income tax and may be subject to a surrender charge. If taken prior to age 591⁄2, a 10% federal income tax penalty may apply.
What are some fixed deferred annuity contract benefits?
A nnuity Income Payments
O ne of the most important benefits of deferred annuities is your ability to use the value built up during the accumulation period to give you a lump sum payment or to make income payments during the payout period. Income payments are usually made monthly but you may choose to receive them less often. The size of income payments is based on the accumulated value in your annuity and the annuity’s benefit rate in effect when income payments start. The benefit rate usually depends on your age and sex, and the annuity payment you choose. For example, you might choose payments that continue as long as you live, as long as your spouse lives or for a set number of years. Payment of lifetime income is contingent upon the claims-paying ability of the issuing company or companies.
There is a table of guaranteed benefit rates in each annuity contract. Most companies have current benefit rates as well. The company can change the current rates at any time, but the current rates can never be less than the guaranteed benefit rates. When income payments start, the insurance company generally uses the benefit rate in effect at that time to figure the amount of your income payment.
Companies may offer various income payment choices. You (the owner) or another person that you name makes the choice. The choices are described here as if the payments are made to you.
Life Only
T he company pays income for your lifetime. Payment of lifetime income is contingent upon the claims-paying ability of the issuing company or companies. It doesn’t make any payments to anyone after you die. This payment choice usually pays the highest income possible. You might choose it if you have no dependents, if you have taken care of them through other means or if the dependents have enough income of their own.
Life Annuity with Period Certain
T he company pays income for as long as you live and guarantees to make payments for a set number of years even if you die. This period certain is usually 10 or 20 years. If you live longer than the period certain, you’ll continue to receive payments until you die.
If you die during the period certain, your beneficiary gets regular payments for the rest of that period. If you die after the period certain, your beneficiary doesn’t receive any payments from your annuity. Because the “period certain” is an added benefit, each income payment will be smaller than in a life-only payment choice. Payment of lifetime income is contingent upon the claims-paying ability of the issuing company or companies.
Joint and Survivor
T he company pays income as long as either you or your beneficiary lives. You may choose to decrease the amount of the payments after the first death. You may also be able to choose to have payments continue for a set length of time. Because the survivor feature is an added benefit, each income payment is smaller than in a life-only payment choice. Payment of lifetime income is contingent upon the claims-paying ability of the issuing company or companies.
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