Advanced Guide to Annuities

Puzzled about how to create your own retirement “paycheck” from your investments when interest rates are low? We can help.

1. What investment options do annuities have?

This depends on what type of annuity contract you have. If you have a fixed rate annuity, you are not responsible of choosing the investments; the insurance company  pays you an interest rate for the duration of the contract, usually at a pre-determined fixed return.

When you decide to buy a variable annuity, you essentially decide to invest the money in the various sub-accounts that are offered within the annuity (these are basically, mutual funds). The value of your annuity depends solely on the performance of these sub-accounts that you choose. Although variable annuities have the benefit of tax-deferred growth, the fees are larger than in normal mutual funds, so their performance can sometimes be lower than ordinary mutual funds.

Always make sure to check with your financial advisor.

To get more information and discuss the specifics, please fill out the form to speak to one of our annuity specialists.

2. How does my health impact the decision to buy an annuity?

Insurance companies have a vast pool of annuitants and although they may have a different experience when it comes to their clients’ longevity, most companies make the assumption that their clients are in good health when they purchase an annuity. If, however, you are in poor health when buying an annuity, or believe you have a shorter life expectancy you should think carefully before you purchase. If you do want to buy it, regardless of your health condition, you have the option to choose a fixed annuity for 5, 10, 15 or 20 years. This guarantees that you will receive a regular income in retirement.

If you want to choose a joint or survivor annuity, and one of you are in poor health, you should combine a life annuity (with a period certain) for the healthy spouse and a fixed period (certain) annuity for the one in poor health. This combination may maximize the income payments.

To get more information and discuss the specifics, please fill out the form to speak to one of our annuity specialists.

3. I am not satisfied with my current annuity. Should I exchange it for a new one?

Before doing anything, make sure you fully understand the new annuity contract. Check every fee, charge, features and benefits against your existing contract. Ask the sales agent a lot of questions and ask for an opinion, but don’t rely solely on it.

Be extremely cautious when someone suggests you to exchange an annuity for a different one. According to federal law, annuities exchanges are known as 1035 exchanges. The regulation is detailed in the 1035 section of the Internal Revenue Service code. Sometimes, a sales agent may recommend you an annuity swap because you can get new features without any additional costs or fees and maintain the tax deferral status of the account.

Be aware that swapping an annuity may start a new surrender period. For instance, if you have a 10 year old annuity, you can access the whole account value without surrender charges. However, if you decide to make a swap, your new annuity will have a new surrender period, so you will have to wait another 10 years before you can have full access to your account without penalty.

4. Can I use 401(k) distributions to purchase an annuity?

Fewer than 35% of 401(k) plans offer their lifetime income options and there is little help to guide you through the selection process. Remember that the purpose of a 401(k) is to provide income for retirement. It makes sense that if the outcome is income then you should look carefully at what annuity options are available for you.

Keep in mind that commercial annuity plans can sometimes be better alternatives to 401(k) plans. They have better options, are more adaptable and the guaranteed income can be higher. Always make sure to check the market before making any decision.

5. Should I hold an annuity within my IRA?

An IRA grows tax deferred so there is no advantage in this respect in putting your IRA into an annuity.The main reason people put their IRA into annuity is if they want to generate more guaranteed income in retirement. If you are close to retirement and feel that your Social Security income is not enough, you can roll over a portion of your 401(k) into an annuity. The annuity will be an IRA.  The other reason people put their IRA into an annuity is stability and predictability that they can get from either a fixed or fixed indexed annuity.

6. Is an annuity appropriate if I plan to leave money to my heirs?

After your death, your beneficiaries will receive payouts according to your annuity contract. They will owe income tax on the growth or gains that were tax deferred. However, this can be an advantage to them, particularly if they are taxed at a lower rate than you. They also have the option to receive the payouts over a number of years which will spread out the tax burden accordingly.

Annuities can be subject to estate taxes depending on the size of the estate. Contact an estate planning attorney to help you out, and determine whether the estate taxes can affect your annuity in the future.

7. Why is the decision of when to annuitize an annuity so important?


As soon as you annuitize your annuity (meaning that you start receiving payments), there are no other options. The payouts are distributed according to your contract. There is no flexibility, you cannot decrease or increase the payments, and you cannot withdraw funds from your principal.

We believe that there are much better income options using either an income rider or systematic withdrawals.

8. Can I add an income rider onto an existing annuity policy?

No, you can’t do that.

This is because an income rider is an additional benefit that can be added to the deferred annuity policies at the time the contract is issued. These policies work for a specific need, like legacy, confinement care or income. In all cases, income riders must be chosen and included in the contract, at the time of the application. They cannot be added to your plan after it was issued.

9. How do income riders work? How can you calculate how much income you will receive?

A lot of death benefit riders and income rider’s offer guaranteed annual growth rates that are used to create a separate value  (benefit base) from your annuity contract value. The value of the benefit base is used to determine how much guaranteed lifetime income you will receive based on how long you have waited to turn on the income. For instance, income riders offer a growth of around 6% – 7% compounded annually for a specific period of time, or for as long as you defer. The 6%- 7% compound growth can be used only for income and this high percentage stops as soon as you turn on the lifetime income payments.  You can use this account value only for income or other specific needs.

Riders are almost always separate calculations in the annuity contract and they are used to calculate payment levels.

For instance, if income riders are attached to a deferred annuity, your policy will show the total accumulation value. It will also include the rider value and the surrender value. Keep in mind that all these three calculations are different.

Also, annuity policy riders have an added cost most of the time.

Income riders vary enormously between different companies and different products.

10. Should I consider an annuity that increases by a fixed percentage rather than one tied to the Consumer Price Index (CPI)?

Some annuities guarantee payments that increase each year by changes in the cost of living. This increase is subject to a maximum percentage each year, according to the specific annuity. For the equivalent annuity and premium , you will receive lower payments. Keep in mind that it will take several years for these payments to exceed the level payments you would receive from an annuity which does not offer cost of living increases.

Some annuities increase the payments with a fixed rate every year to cover the cost of living increase. For instance, a 2% increase is common in this case.

To get more information and discuss the specifics, please fill out the form to speak to one of our annuity specialists.

11. Can I transfer an annuity from one company to another without having to pay taxes?

Yes, you can do that, but only if the annuity is in the accumulation phase. The Internal Revenue Service allows multiple ways to transfer your funds from an annuity to another annuity, without having to pay taxes. The best way to transfer an annuity to another annuity contract is by a 1035 exchange.

12. I already own a Single Premium Deferred Annuity (SPDA). Should I consider exchanging it?

SPDAs work by accumulating your savings on a tax deferred basis. They can be converted into a stream of regular, guaranteed income, whenever you choose or want to do so by annuitizing the contract.

Tax and insurance laws do not force you to make an exchange with an insurance company that issued the SDPA. This means that you can (and should) get offers or quotes from other insurance companies on the market. This will help you a lot when deciding on the best offer.

Here are some of the benefits of exchanging your SPDA to a regular income plan:

  •  you obtain a secure, regular and lifetime income
  •  you exclude a portion of each payout from tax
  •  you lock in long term interest rates to your advantage

If you decide to exchange an SPDA to income, this may impact your liquidity, so make sure you pay attention to this aspect.

To get more information and discuss the specifics, please fill out the form to speak to one of our annuity specialists.

13. What tax must my heirs or beneficiaries pay if my annuity continues after my death?

If you die, taxes will apply to your heirs (the persons who inherit your estate, if you didn’t designate a beneficiary) or to your beneficiaries (the persons who are designated in your contract to receive payments after your death). Here are the taxes you should expect to pay:

Estate tax – the value of your annuity payments at the time of your death is part of your estate and is subject to estate tax, similar to other assets of your estate. If your annuity passes to your surviving spouse or to charity, this tax does not apply. Estate tax is only paid if the value of the estate is larger than the estate tax exception limit in effect at the date of death.

Income tax – the annuity payouts that your beneficiaries or heirs will receive will be subject to the tax  on the same principles and rules that would apply to payouts collected by you.

Exception – your beneficiaries or heirs are not subject to the 10% penalty on withdrawal before the age of 59 ½, regardless of their age. Also, your age of death doesn’t incur any surrender charge penalties to your beneficiaries or heirs.

14. Why did the tax on my annuity change?

Taxes are set by the United States Congress and administered by the Internal Revenue Service. Every year, the tax tables are updated and posted on the IRS website and in the IRS Publication 151, as well as in Notice 1036.

The insurance company who manages your annuity will update your Federal Income Tax according to the new tax tables and formulas issued by the IRS. The insurer also withholds your required federal taxes according to certain exemptions (dependents) or your marital status. Keep in mind that you can change your tax withholding at any given time. Just make sure to check the amount of your State and Federal tax withholding every year.

15. What are the distribution options for an inherited annuity?

The distribution options for annuity depend on whether you are the surviving spouse or any other person who inherited the asset:

if you are the surviving spouse – provided that there is a spousal continuation provision in the annuity contract, the most common approach is to keep the annuity as your own; this means that you will keep all the options of the owner ;

if you are someone other than the surviving spouse – in this case, you have 3 options to choose from:

  •  a lump sum payout
  • a full payout spread over the next five years
  • elect in 60 days to annuitize over your own lifetime

If you start receiving the annuity payments, you must take them as least as quickly as the owner was taking them.

If a person inherits the annuity, the gains and profits remain the same, according to the contract. The taxes will have to be paid on the entire sum received, or on the regular income you receive, depending on the type of annuity you inherited. Keep in mind that the annuity payments you receive are taxed as normal income, and are subject to a tax  depending on the tax bracket you find yourself in.

If the annuity in question was bought with after tax money, ordinary income is owed on all gains, but it is not owed on the principal. A set portion of each annuity payment is considered tax-free return on the principal. This spreads the tax liability out over time. Obviously, if you select the lump sum payout, the tax liability spread won’t be applicable.

16. How can I calculate the future value of my annuity?

 The future value of your annuity is calculated by taking into consideration your contributions multiplied by the compound interest. This amount of money is what you will receive after the accumulation phase is complete. To determine the future value of your annuity, you’ll have to assess how much you want to invest every year and the fixed rate of return. This allows you to determine how much money you will have at any point in the future.

You can use this formula to determine the future value of your annuity. This formula is based on an ordinary annuity, with equal value payments made at the end of each period.

FV = P * {(((1+R)^N) – 1) / R}

Here, P is the payment amount, N is the number of periods and R is the interest rate.


The time value of money

To determine your annuity’s value in the future, we use the concept of time value of money. This states that a dollar earned today is more valuable than a dollar earned tomorrow. This is because the funds you already earned can be invested, gaining  a profit in the future. Essentially, this means that the value of your annuity in the future, will be larger than all the payments you made throughout the years, during the accumulation phase. Because these contributions have been earning interest, you will have more money than you put in. For instance, if you invested $500 today, the same investment will be $550 next year, on the same day, if the interest is 10%. The same goes for a $1 investment. The next year, your investment will be $1.10.

Here is an example:

Let’s imagine a scenario where you make annual payments of $4,000 to your annuity for 20 years. Your interest rate, for this scenario, is 8%, compounded annually:


FV = $4,000 * {(((1+0,08)^20) – 1) / 0.08}

FV = $4,000 * {((1,08^20) – 1) / 0.08}

FV = $4,000 * 3.661 / 0.08

FV = $183,050

Without the compound interest, your annual payments will only net you $80,000 after 20 years ($4,000 * 20). However, when you include the compound interest in the equation, you will have more than double that amount, after the same period ($183,050).

Annuity due

As opposed to ordinary annuities, annuity dues make payments at the beginning of each period. In order to calculate the future value of an annuity due, you simply multiply the ordinary future value by 1+R. In the example above, the future value of the annuity due is: $183,050 * (1+0.08) = $197,694.

17. Want to learn more?

Our company has access to qualified and trained advisors across the United States who can help you differentiate the various types of annuity products and services. This can help you decide on the best product for your retirement and income needs.

To get more information and discuss the specifics, please fill out the form to speak to one of our annuity specialists.

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