Retirement Made Simple

Overview

Definition - An annuity is a contract with an insurance company. All annuities have one feature in common, and it makes annuities different from other financial products. With an annuity, the insurance company promises to pay you income on a regular basis for a period of time you choose – including the rest of your life.
Common Annuity Features:

1. Tax-deferral - Tax-deferred growth allows your money to grow faster because you earn interest in dollars that would otherwise be immediately taxable. Your premium earns interest, the interest compounds within the contract, and the money you would have paid in taxes earns interest. Income taxes are deferred until funds are withdrawn from the contract.

2. Surrender Charges - Most all annuities have a surrender charge schedule. A surrender charge applies to withdrawal amounts that are greater than the penalty-free withdrawal amount. The amount of the surrender charge is a percentage of the account value, this percentage generally decreases over time in the annuity contract.

3. Death Benefit - Most annuity types contain a death benefit. Often times, this is the current account value at the time of death and all surrender charges are waived. In some annuity contracts there is an enhanced death benefit rider option (often offered for an additional annual fee). 

Type of Annuities

There are many different types of annuities, however they all are either “fixed” or “variable”

 

Fixed Annuity

A “fixed annuity” is a type of annuity contract that allows for the accumulation of capital on a tax-deferred basis. In exchange for a lump sum of capital, a life insurance company credits the annuity account with a guaranteed fixed rate of interest while guaranteeing the principal investment.

Variable Annuity

A “variable annuity” is a type of annuity contract that allows for the accumulation of capital on a tax-deferred basis. As opposed to a fixed annuity that offers a guaranteed interest rate and a minimum payment at annuitization, variable annuities offer investors the opportunity to generate higher rates of returns by investing in equity and bond subaccounts. If a variable annuity is annuitized for income, the income payments can vary based on the performance of the subaccounts.
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More Info

Fixed Annuities are financial products that can serve a variety of needs. These contracts, assuming the funds are held to the end of the Guarantee Period, may provide a safe haven for growth with important guarantees related to principal.
Because returns are not taxed until withdrawn from the contract, Annuities enjoy the advantage of compounding in three ways:

• Interest is earned on deposits

• Interest is earned on interest

• Interest is earned on money that would have gone to pay taxes, if that money had been placed in a product that is immediately taxable.

Within a well-developed financial plan, Annuities enjoy tax deferral on funds left to accumulate, perhaps deferring those taxes to retirement when a client’s income tax bracket may be lower. Annuities may also aid in the inter-generational transfer of wealth because Annuities, when structured to pay a death benefit directly to a named beneficiary, avoid the probate process.

Questions To Ask Yourself

It's important that consumers considering an Annuity have a good understanding of their own situation. Before deciding on an Annuity, consumers need to clearly identify their financial goals:

• What is my overall financial strategy?

• What does the purchase of an annuity need to provide?

• Do I need growth, income, or some combination of the two?

• How soon will I need the money in the annuity?

• If I purchase an annuity, will I have sufficient liquid assets to deal with emergencies?

Need help answering these questions? We're here to help.

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