An annuity, or an annuity contract, is a contract between an insurance company and you, which has the benefit that your earnings grow and compound, tax-deferred. Tax deferral allows increased wealth accumulation and is an excellent benefit for your retirement and long-term financial goals. Essentially, annuity means “annual payments”. However, income from an annuity plan can be received annually, quarterly, monthly or as a lump sum payment. They are a very popular choice among long-term investors who want to prepare for their retirement, safe in the knowledge that they will receive a guaranteed income. The amount of your payments varies depending on the length of the payment period, as well as multiple other factors, including your age, sex, joint life or period certain options.

All annuities have an accumulation phase and a payout phase. Every time you buy an annuity, your insurance company will agree to pay you an income over a period of time. There are two types of annuity: immediate annuity (where the payments start immediately) and a deferred annuity (where you get the payments after an accumulation period).

Always make sure to fully research your options before considering buying an annuity. Consult with an experienced annuity professional and make sure you understand the annuity contract, what it entails, the details regarding the payments and if it is suitable for your financial situation.

Every annuity contract has 4 parties: the owner, the insurance carrier, the annuitant and the annuitant’s beneficiary.

The owner is the central part of any annuity contract. He or she can change the ownership in the annuity and can access the cash surrender value. The owner has the right to make withdrawals, assign the policy and name beneficiaries. Usually, the owner of the annuity is also the  annuitant.

There are two main types of annuities to choose from: immediate annuities and deferred annuities.

Immediate annuities allow you to get payments right away, after signing the contract. You decide whether you want lifetime income or only for a specific number of years. Many customers choose to receive the payments over their entire lifetimes, to ensure they never run out of money. The Insurance Company will calculate the exact payments and your income based on your purchase amount, life expectancy and other factors.

Deferred annuities work differently. They have two phases: firstly, you have the accumulation phase, where you let your money grow, tax deferred. Secondly, there is the payout phase, where you begin to receive the monthly, quarterly or annual payments. During the first phase, you grow your money tax deferred until the second phase. You only pay taxes when you receive the scheduled payments or the lump sum.

Payouts usually occur during retirement years, and can be after a long period of accumulation. The longer the deferral period the  larger  the amount of income that will be received every month, quarter or year, depending on your needs. Additionally, you have the option to take partial withdrawals during your accumulation phase or cancel your annuity. You can also convert your annuity into a stream of income payments whenever you want (annuitization) – this essentially turns your deferred annuity into an immediate annuity.

There are three main types of annuities, depending on their type of interest: variable, fixed and fixed index annuities. They differ in the way they earn interest or change in value and by the amount of risk involved. Here’s a quick guide:

Fixed annuities

When you buy a fixed annuity, the insurance company guarantees an interest rate for a set period of time, no matter the market conditions. After this period, the company will offer a renewal rate of interest, and another fixed term. Most fixed annuities contracts guarantee a maximum and a minimum interest during the whole contract period, regardless of market changes. Simply put, you will never receive less than your guaranteed rate, no matter what happens in the market. The company takes the risk in its own hands. Fixed annuities are popular because with owners who want to know exactly their rate of return is and how much their interest rate is at any given time.

 

Fixed index annuities (“FIA’s”)

Fixed index annuities have the potential to earn higher interest than fixed annuities over time. However, returns are not guaranteed and therefore have a higher performance than Fixed annuities. Previously they were known as equity indexed annuities, however, this was considered to be misleading as there are no investments in equities. Therefore it has less potential risk than variable annuities, but less potential return on investments.

Typically, fixed index annuities earn interest based on the performance of an investment-based index, such as the S&P 500 Composite Stock Price Index. The $&P500 is collection of 500 stocks that represents a broad segment of the stock market. Your annuity earns interest based on the positive movement of the Index and once credited, the earnings are locked into the account value. In years when the Index goes down, the annuity will earn ZERO interest. Because the annuity is not invested in the market the account value will not lose value in downturns. As the FIA only earns interest when the Index has positive returns and are locked in, the value can never go down. Therefore fixed index annuities gives you plenty of security, and guarantees,  similar to normal, traditional fixed annuities, with higher potential growth.

Variable annuities (“VA’s”)

Variable annuities  are ideal for investors who want to get the highest potential return from their investments and are prepared to accept the higher investment risks. You, as the owner, allocate your funds according to your investment preferences: there are multiple investing options available, from conservative to more aggressive and risky fund options. Insurance companies call these sub-accounts and you can choose how many you have and how you allocate your funds. Your returns and profits are tied to how well these sub-accounts perform. The performance of these sub-accounts can vary greatly and the earnings and principle are not guaranteed. The risk profile differs greatly from fixed annuities and fixed indexed annuities, but may have higher returns with higher risks. The policy owners bear the whole investment risk and possible loss of principal. Variable annuities are a very complex product and the broker who sells them has to be fully licensed to sell securities.

All these three types of annuities, fixed, fixed index and variable, offer a diverse combination of possible revenue streams for your annuity contracts. They are all tax deferred and you can grow your money faster, which means that you will have more money for retirement.

 Growth potential

Fixed index annuities have the potential to generate better returns than traditional fixed annuities, which only have a minimum fixed interest rate. There’s also no market risk that can affect your principal – this is protected from market fluctuations.

The income is guaranteed and helps you sleep better

Annuities have a huge advantage: they are tax deferred and can guarantee a stable income for life. No matter how long you live, you will always have an income.

Helps you fill the gaps

Sometimes, your pension, Social Security or IRAs are not enough for your financial needs during retirement. Fixed annuities are great ways to fill the gaps in your finances, and they are an excellent supplement to your income.

According to us, yes they are.

Annuities can give you a certain income for the rest of your life. The income is agreed upon and can be received monthly, quarterly, annually or as a lump of sump. What’s more, in joint-and-survivor annuity, you or your spouse receives the income if the other spouse has passed away.

Fixed annuities are popular because they provide a regular income as long as you live. Immediate annuities are purchased with an initial lump of money and pay out an income immediately. There are a lot of payout options and variables, and they are all guaranteed by your insurance company. Typically, the longer you want the income, the lower the actual size of your paycheck. All insurance companies will calculate exactly your paychecks depending on multiple factors, such as interest rates, life expectancy or principal.

Variable annuities are for investors who seek a potentially higher return from investment sub accounts and accept the higher risk and want to take a more active role in their investments. The investment alternatives allow you to diversify your portfolio and tailor your portfolio according to your needs and risk tolerance. Unlike fixed annuities, variable annuities are not guaranteed by the insurance company and you assume the investment risk. Variable annuities can lose value and can have very high fees associated with them. Be sure to find out exactly what fees you are being charged.

In essence, fixed annuities offer you the security of a guaranteed fixed income, no matter what. In exchange, for these guarantees you lose control of your principal for the length of the annuity contract and cannot decide on the investment options.

Both fixed annuities and variable annuities allow you to withdraw funds, as long as the contracts have not been annuitized. As soon as the annuity is annuitized, the insurance company can only pay the scheduled income, and withdrawals are not allowed. You basically exchange a lump sum of money into a regular income for a number of years or for your lifetime, depending on your needs.

 

To buy an annuity, you have several options depending on where the funds are currently. One option may be to write a check to the insurance company. Securities or investment accounts cannot be swapped for an annuity but there are however, certain ways to transfer your funds for one or more annuities:

• You can transfer your assets from an IRA, a qualified employer plan or 401(k) to your new IRA annuity or do a 60 day rollover.
• 1035* exchange of any type of deferred annuity, in part or in full
• 1035* exchange of cash value of a life insurance policy

A transfer, 60 day roll over or a 1035 exchange means that you will not pay any taxes when moving funds to the new annuity.

*according to section 1035 of the Internal Revenue Code

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

The answer to this question depends on how much guaranteed lifetime income you need or want during your retirement. You should also take into consideration your time horizon, current financial situation and your risk tolerance. Also, think about your other sources of income during retirement: Social Security, pensions or other types of income. Keep in mind that allocation of retirement savings into annuities is both a resource allocation and a risk management decision. Annuities are guaranteed types of income during retirement, so you should consider them an important part of your resource allocation decision.

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

Usually, the funds you use to purchase an annuity can come from your retirement savings, other annuities you already own or a lump sum of money from a life event. These life events might include, but are not limited to, an inheritance, proceeds from a life insurance policy or from the sale of a home. Premium deposits can also come from interest-bearing accounts, especially if the interest is part of your retirement income you spend. Money can also come from retirement plans, such as 401(k) and 403(b), etc. and pension lump sums. Where possible you try to avoid liquidating assets that realize a taxable gain, ie stocks held outside qualified plans.

There are, however, several situations in which the capital gain is not taxed:

Deferred annuity (either fixed or variable annuity):

Although they might have appreciated since the time of their purchase, they may be exchanged income tax-free to another annuity plan, under section 1035 of the Internal Revenue Code. Taxes will still be eventually paid, but they will be spread out on the annuity regular paychecks, especially if you are in a lower tax bracket or upon death of the annuitant.

Proceeds from the downsizing of your home:

If your home has appreciated in value, up to $500,000 of that value can be excluded from taxation.

Inheritance:

Often, you may receive appreciated assets, and they receive a step up in basis at death. This unrealized capital appreciation is not taxed.

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

 No matter what type of annuity you choose, either immediate or deferred, your payout options remain the same. You can choose to receive your payments either monthly, quarterly, semiannually or annually. You can also schedule a specific period of time in which to receive the payments. Similarly, you can choose a payment plan that will guarantee payments for as long as you live. Payouts can be done:

•  in advance – the income will be from the start date
•  in arrears – the income is paid monthly, quarterly, semiannually or annually, after the start date

You can also receive payouts on a chosen start date, meaning that you will receive the payment on a specific date each month. Your first payment is available within one month of the start date of the annuity plan, and is available only when the income is coming in monthly.

Current federal law guarantees many advantages to annuity plans. They receive special tax treatment and the income tax on annuities is deferred. This means that you are not taxed on the interest your annuity earns while being part of the annuity. Simply put, the money you put into an annuity, and the profits you make, are not taxed. If you buy an immediate annuity, a portion of each payment is considered earnings, and a portion is considered tax-free return of your principal.

Your earnings are taxable as normal income when the payouts or payments are made, but only before you are 59 ½ years old. In this case, a 10% IRS penalty may be levied. As soon as enough payments are made and you recover the tax free principal, the next payments become fully taxable. There are other ways to access your funds: instead of annuitizing, you can take withdrawals whenever you need. These distributions are taxable, like normal income. After all the earnings are distributed, the principal becomes yet again tax-free.

If your annuity plan is part of an IRA, 401(k) or any other qualified retirement plan, every payment will be taxable as normal income. Consult your tax advisor for more details on this issue.

Our company is not authorized to give out tax advice to our customers, so please talk to a specialized advisor about your specific situation.

 

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

 

One of the biggest advantages of annuity plans is that they provide and guarantee payments, no matter what. Only an insurance company specialized in annuities can guarantee these payments for as long as you live.

There is no annual contribution limit for non-qualified annuities, unlike other tax-deferred retirement accounts, like 401(k) or IRAs. You can put any amount of money for your retirement, which can be a very useful and practical way to catch up on your retirement savings.

Another advantage is the fact that annuities are not taxed until you make withdrawals. All the money you put into your annuity is tax deferred and compounds year after year and you won’t get a bill from Uncle Sam. This means that every dollar can work harder for you and you don’t have to pay any taxes during the accumulation phase.

If you want to cash out, you can choose to either take multiple payments or a lump sum of money, depending on your needs.  When you choose multiple payments, you can have a steady source of income for the rest of your life.

If you live in Florida, annuities are protected from creditors.

Annuities can work very well to fill the gaps for other retirement sources, such as pensions and Social Security, and can help you maintain a certain standard of living.

Make sure to check or ask about the fees and costs attached to every annuity you want to purchase. Annuities don’t charge an initial commission or load, but do have surrender charges if you want to cash out your annuity early.

Some companies may allow free withdrawals during the first year of the contract, but most make you wait until the second year. They usually allow the withdrawal of a small portion of your principal, a maximum of 10% usually. Some annuity contracts are offering greater access to your money by allowing free withdrawals of 20% or more but for an additional fee. As stated before, these withdrawals are subject to income tax and, if done before reaching the age of 59 ½ years, they are also subject to an additional 10% penalty tax by the Internal Revenue Service.

Surrender charges are not applied to immediate annuity contracts, because the initial principal cannot be surrendered. On the other hand, variable annuities usually have higher fees and charges because all the sub-accounts need to be managed individually plus fees for death benefit riders and income riders. These fees run up to 3% or even more, depending on the insurance company.

Make sure to check or ask about the fees and costs attached to every annuity you want to purchase. Annuities don’t charge an initial commission or load, but do have surrender charges if you want to cash out your annuity early.

Some companies may allow free withdrawals during the first year of the contract, but most make you wait until the second year. They usually allow the withdrawal of a small portion of your principal, a maximum of 10% usually. Some annuity contracts are offering greater access to your money by allowing free withdrawals of 20% or more but for an additional fee. As stated before, these withdrawals are subject to income tax and, if done before reaching the age of 59 ½ years, they are also subject to an additional 10% penalty tax by the Internal Revenue Service.

Surrender charges are not applied to immediate annuity contracts, because the initial principal cannot be surrendered. On the other hand, variable annuities usually have higher fees and charges because all the sub-accounts need to be managed individually plus fees for death benefit riders and income riders. These fees run up to 3% or even more, depending on the insurance company.

Most annuity contracts allow cash withdrawals at least once a year, at a maximum of 10  of the accumulated value, without any additional fees or charges from the company. However, according to federal law, the income taxes apply to these withdrawals. Another way to receive payments from your annuity is to establish a systematic withdrawal plan. This systematic withdrawal schedule allows you to enjoy a regular source of income, according to your needs, either monthly, quarterly, semiannually or annually. This is different from annuitization, which is permanent. Systematic withdrawals are very flexible and allow you to take cash out of your money whenever you want it or stop the payments when not needed. You can also increase or decrease your payments, as your needs dictate. Systematic withdrawal plans are ideal for clients who want flexibility and financial comfort, without giving up control of their money or taxes. Systematic withdrawals always tax only the earnings first. After your earnings are depleted, your principal remains tax-free.

Annuities are complex financial products and can only be sold by licensed insurance professionals who received product specific training. An annuity sales agent must be a representative of a licensed insurance company and must be fully licensed in your state. Representatives and sales agents are compensated by the insurance company. The compensations will not be deducted from your principal or from your earnings.

The annuity market is very competitive and there are hundreds of different insurance companies who offer them to the public. The rates offered vary greatly for the same type of annuity contract, so pay attention to this aspect whenever you want to purchase a plan. Rates can differ by up to 10% which can affect the performance of the annuity. Some annuities offer a bonus or premium enhancement that may look very attractive. However, sometimes the rates offered are lower than annuities that do not have a bonus.

A good idea is to check insurance company’s financial ratings. Just make sure you check the latest ratings, as they can vary a lot over the years. This is because their financial targets can differ and change, according to the market. Considering that annuity plans are very similar, always try to choose the insurance company who has the best rates, lowest fees and the highest ratings. Also, pay particular attention to reviews and ratings from the public or from specialized rating agencies.

An annuity is ideal in the following situations:

You want more money for your retirement fund – annuities are great tools to get a little extra income for your retirement fund. If you already contribute the maximum amount to 401(k) or IRAs, annuities are attractive retirement plans that grow tax-deferred.

You don’t need the money now – annuities are excellent for people who don’t expect to need their money soon and can keep their money until they reach the age of 59 ½ years. This is when a fixed annuity contract becomes particularly helpful for you.

You are worried you will outlive your retirement savings – annuities provide a steady, regular income for the rest of your life, no matter how long you live. For instance, if you live to 100 or 110, you will still receive regular payments, even if your other retirement funds have been depleted. Keep in mind that people live longer nowadays, so annuities can be a solution to long term retirement plans.

The type of transactions that follow your death depend on the type of your annuity contract. It depends on how your payouts were initially calculated, or whether you named a beneficiary on your account. In some cases, that beneficiary may receive the future payments, according to your contract. This is also true for spousal continuation types of annuity contracts, where your spouse will receive payouts for as long as she or he lives. Other annuities simply pay you as long as you live, and cease as soon as you die.

You are protected by The Legal Reserve System

We are asked often, “Where can we place assets that provide safety and security in uncertain times”? One place that should be considered is life insurance companies that have a Legal Reserve classification.

Life companies that comply with the legal reserve requirements established by the state insurance laws are known as Legal Reserve Life Insurance Companies. Legal Reserve companies had their strongest showing of strength during the Great Depression of 1929-38 when some 9,000 banks suspended operations while 99% of all life insurance in force continued unaffected. Many people are not aware that it was not the government that bailed out the banking industry during the Great Depression; it was the U.S. insurance companies. Reinsurance, acquisitions, and mergers protected virtually all policy owners in the affected companies against personal loss. While thousands of banks closed across the United States, the insurance companies remained in force and continue to this very day.

The State Insurance Department 

Most state insurance departments mandate a conservative “statutory” accounting system that will insure company solvency. This “statutory” system has been successful for decades in minimizing insurance company failures and preventing policyholder losses. The state insurance department does review and measure the insurance companies’ cash flow and liabilities to ensure that they have the cash to meet policyholder obligations. They are audited by state insurance departments at least every 3 years. Life insurance companies also file quarterly and annual statements

Required Reserves Ensure Payment of Policyholder Benefits 

A large percentage of each premium dollar calculated by actuaries for each company goes into the policy owner’s reserve fund. This policy reserve (Legal Reserve) fund is a liability to the life insurance company. The fund is established as a way of determining or measuring the assets the company must maintain in order to be able to meet its future commitments under the policies it has issued.

If an insurance company’s reserve levels fall short, and it goes into what is called receivership, the remaining insurance companies in the state legal reserve pool must assume the liabilities and obligations of the insurer. The amount they are required to accept are based on the amount of insurance and annuities they have issued in that state. If one company has issued 10% of all insurance and annuities in that state, then they must accept 10% of any bankrupt insurer’s obligations for that state.

The reserve liabilities are established as financial safeguards to ensure the company will have sufficient assets to pay its claims and other commitments when they fall due. These assets are kept intact for payment of living and death benefits to the insured’s. The reserve pool protects annuity investors as well as those who purchase other life insurance products or policies.

Periodic Company Examinations 

Every year all legal reserve life insurance companies submit annual statements to the insurance departments of each state in which they are licensed to do business. The format and contents of the forms used are prescribed by the State Insurance Commissioners and they are a detailed report of an insurance company’s financial status that is important in evaluating the company’s solvency and compliance with the insurance laws. Every few years, depending on a company’s home state law, all companies operating in more than one state undergo a detailed home office zone examination of its financial position. This audit is conducted by a team of State Insurance Department Examiners representing the various zones in which the company is licensed to do business. Companies licensed in only one state are subject only to an annual home office examination by their State Insurance Department.

Additional Security Safeguards 

1. Reinsurance: Nearly every legal reserve life insurance company further protects its policyholders by reinsuring part of the coverage with a life reinsurance company. This is done when the company will not or cannot undertake a risk alone. Reinsurance prevents relatively sizable claims from depleting a company’s policy holder reserves. The amount reinsured depends on many factors such as the size of the individual claim and the number of claims a company can expect.
2. Surplus: The surplus is the amount by which a company’s assets exceed its liabilities. The surplus protects the policyholders and third parties against any deficiency in the insurer’s provisions for meeting its obligations. The determination of the optimum amount of surplus that a company will retain must be based on experience, current conditions, and an awareness of the primary goal of maintaining a strong company that is always able to pay claims as they arise.

Mergers 

In the unlikely event that a company’s annual statement or its own examination reveals possible financial weakness, one of several avenues is open to the company: (1) Produce additional operating capital; (2) Sell its business to another life company; (3) Merger into another financially stable life company. A legal reserve life insurance company simply does not close its doors and go out of business declaring that all policies are null and void. Legal reserve life policyholders enjoy personal security safeguards unknown by other types of business.

Yours for Life 

Another unique advantage of legal reserve life insurance is that if one company is purchased or merged into another, there is no change whatsoever in the policy benefits or premiums. Legal reserve life insurance companies have established a public responsibility to respect both the letter and the spirit of laws and regulation so the interests of their policyholders are always protected.

Policyholders Protection Comes First 

The Legal Reserve System was established to insure a high level of safety so that annuity and life companies have the cash when you need it. Through strict state insurance department regulations and because of the insurance industry’s history of financial stability and public responsibility to operate in a manner not detrimental to the welfare of the community, your policy, principle and interest is guaranteed to be secure by industry safeguards.

Every state have a “free look” provision which means that you are allowed to study the annuity contract after buying it. If, during this “free look” period you change your mind and you wish to cancel the annuity, you can return the contract to the insurance company and get all your money back. This period is also known as the “right to return period” and it should be clearly stated in your contract. Make sure you fully read your contract during this free look period, and ask any questions you might have.

Qualified annuity contracts have funds that comply with federal tax code requirements and retirement plans, like IRAs, SEP-IRAs, Roth IRAs, TSAs and 403(b)s. These are eligible for various tax advantages and treatments.

Non-qualified annuity contracts have funds that come from “after tax sources”, like savings accounts, proceeds after selling a home or after selling stocks/bonds or any other life events.

Both qualified and non-qualified annuity contracts offer tax-deferred interest compounding and have the option of guaranteed lifetime income, according to your specific contract. All annuities are subject to IRS specific penalties for withdrawals before the age of 59 ½ years. To learn more about taxes related to annuities, consult your tax specialist.

If you buy an annuity with a joint-and-survivor, a joint annuitant is a person named to continue receiving the payments after you die. Essentially, after the annuitant’s death, the joint annuitant receives the payments, according to the contract. Usually, the joint annuitant’s gender and age are factored in to determine how long the benefits will be received. After the purchase, the joint annuitant cannot be changed, but the beneficiary can be changed. The beneficiary, in this case, is a person named in the contract who may receive a lump sum of cash as a death benefit or monthly payments after the annuitant’s death, according to the contract.

The accumulation phase is the period of time during which the value of your annuity is growing tax deferred. This phase ends when you opt to start taking income or annuitization begins. In other words, accumulation is followed by the payout phase, when you start receiving payments.

Although they were around for many years, annuity riders have become popular after the market crash of 2007 and 2008. A lot of investors were seeking  annuities that guaranteed an income which was attached to their mutual funds. These attached benefits are called income riders and are commonly used in conjuncture with variable annuities. Nowadays, income riders are very diverse and can be purchased on fixed and fixed index annuities as well. Income riders usually have a fee that is charged.

Annuities are very different from life insurance plans. While life insurance can insure you if you “die too soon”, an annuity provides insurance in case you “live too long”. Annuities guarantee an income for as long as you live, or for a set period of time. Essentially, annuities can guarantee a source of income for life, no matter what happens.

In case you “die too soon”, your annuity beneficiary will get back a lot more from your insurance than what you paid in. Similarly, if you “live too long”, and exceed your life expectancy, you get far more money back than what you initially paid in.

In general, variable deferred annuities and variable immediate annuities are not liquid. Variable immediate annuities only offer fixed monthly payments and don’t let you receive a total lump sum, and therefore cannot be liquidated. Similarly, variable deferred annuities are subject to IRS penalties for early withdrawals and include surrender charges.

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.