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Annuities Information

What is an annuity?

An annuity is a long-term investment between you, the annuitant, and an insurance company, the annuity issuer. Under this contract, you pay after-tax funds to the annuity issuer, who then invests your principal to meet your financial objectives and pays you or your beneficiary back with earnings (subject to the claims-paying ability of the issuer).

If you have  a fixed annuity, your interest rate is guaranteed. With a variable annuity, your earnings are linked with the fluctuating performance of your investments and may be worth more or less than your principal when redeemed. In addition, you have added control in how your money is invested, creating a higher potential for growth. However, this option comes with a higher risk in return.

Unlike other investment plans, there is no limit to how much you can invest in an annuity. Your funds will steadily grow with a tax-deferred status, and you pay your regular tax income rate on only your earnings upon withdrawal.  

What annuity options are available?

An immediate annuity can begin paying you right away. You can choose whether you want your income guaranteed for a specific time period or if you want lifelong payments. The amount of your payments is calculated based on your principal and your life expectancy.

A deferred annuity is broken up into two phases:

  • Accumulation: This is when you add money to your annuity, whether you pay in a lump sum or you make a series of payments. You can continue to let your account grow tax-deferred for an indefinite amount of time.
  • During the accumulation phase, the fund grows tax deferred, it does not grow tax free. If the annuity was not purchased as part of a qualified retirement program such as an IRA, 401(k), TSA, or 457 plan, income taxes are paid on the earnings when money is ultimately paid out. If the annuity is part of a qualified plan the entire fund is subject to income taxes as it is withdrawn.
  • Surrender charges for early withdrawals.
  • If you withdraw money from your annuity before age 59 ½ it is called a "premature distribution" and is subject to an additional 10% IRS penalty.
  • If a premature death should occur, the accumulated funds within the annuity are transferred to the named beneficiary, avoiding probate costs.
  • Annuities can vary by payment mode and are available as "single premium"(purchased with one-time payment) or "flexible premium" (purchased with recurring periodic payments). They also vary by timing of the annuity income and may be available as a "deferred annuity" (which means that annuity income payments are deferred until later) or as an "immediate annuity"(which means that annuity income starts immediately).
  • For fixed and indexed annuities there is safety of principal and earnings.
  • Variable products are subject to mortality and expense charges and administrative fees not typically found with other investments.
Types
  • Fixed annuities
  • Variable annuities
  • Indexed annuities
Fixed Annuities

In a fixed annuity, the insurance carrier:

  • Declares a current rate of interest for a specified time period. Once the time expires the company will set a new rate which may be higher or lower than the original rate.
  • Guarantees a minimum interest rate of return which is specified in the contract, and at no time may the current or renewal interest rate fall below it.
  • Guarantees the principal.
Variable Annuities

A variable annuity has two types of accounts:

Fixed Accounts

In a fixed account, principal and interest are guaranteed by the insurance company. Interest rates are usually guaranteed for one year but can be longer.

Variable Accounts

In a variable account, the annuity owner bears the investment risk. Policy values vary directly with market performance and may result in a loss of principal and prior earnings. Earnings are tied directly to the performance of various underlying investment vehicles which are available within the variable annuity and are selected by the owner.

* Indexed Annuities

An Indexed Annuity has interest rates that are linked to growth in the equity market as measured by an index such as the S&P 500. The FIA owner enjoys the upside potential of equities but is not exposed to downside risk if the annuity is held to term. Subject to fixed minimum guarantees, the value of an FIA can only increase due to market growth ‐ it will never decline due to market movement. There are many variations in product design. No two of the FIAs are exactly alike, and some are very different from each other. However, all the various types fall into three general categories: annual reset, point-to-point, and annual high-water mark with look-back. The following is a simple definition of each. Please call us if you would like to know more.

Annual Reset - Also known as the annual ratchet design, the annual reset design resets the starting index point annually. It also credits index increases (interest) annually and compounds annually.

Point-to-Point - The point-to-point design measures the change in the index from the start of the term to the end of the term.

Annual High-Water Mark with Look-Back - The annual high-water mark with look-back can be viewed as a variation on the point-to-point design, except that it measures the index from the start of the term to the highest anniversary value over the term.

* Some annuities allow the insurance company to change participation rates, cap rates or spread/asset/margin fees either annual or at the start of the next contract term. If an insurance company subsequently lowers the participation rate or cap rate or increases the fees, this could adversely affect an investor's return. Therefore, a prospective investor must carefully review his or her contract in order to examine these issues.

Withdrawal
  • Withdrawals may be made at any time. However, the withdrawal may be subject surrender charges and if done before age 59 ½ there will be a 10% IRS penalty. Some contracts allow an annual 10% withdrawal free of surrender charges.
  • The owner may pre-authorize a systematic periodic withdrawal plan. The owner of the contract instructs the company to withdraw a percentage or a level dollar amount from the contract on a monthly, quarterly, semiannual, or annual basis.

Distribution: This is when you begin withdrawing money from your annuity whether you take out systematic withdrawals or you annuitize to supplement your finances with a regular stream of income for life.

As part of the distribution phase, the owner has two options, he or she can withdraw money (either in a lump sum or elect a systematic withdrawal plan) or annuitize (purchase an annuity pay out plan).

Annuitization

When the owner annuitizes the funds he or she purchases an annuity pay out plan. In a Fixed and in an Indexed Annuity the owner purchases a monthly income that will be paid to him or her until death. It is a guaranteed income that will not change. In a variable annuity, the owner has an option to do the same or transfer all or part of the contract to one or more of the sub-accounts that are available, and annuitize those funds. The funds that are annuitized in the separate accounts produce an income that will change from month to month based on the performance of the sub-account that the funds are placed in.

Annuity Pay Out Plans

Life Only - Periodic monthly payments to an annuitant for the duration of his or her lifetime and then ceases. It is for a lifetime, the annuitant cannot outlive the payments. The payments are determined at the time of purchase and are based on age and sex.

Life with 10 years certain - Payments will be made for at least ten years, regardless if the annuitant lives for the entire ten years. If the annuitant dies during the ten-year period the remainder of the ten-year payments will be made to a beneficiary. If the annuitant lives longer than ten years he or she will continue to receive payments for his or her lifetime. The guaranteed monthly payments will be less than "life only."

Life with 20 years certain - Payments will be made for at least twenty years, regardless if the annuitant lives for the entire twenty years. If the annuitant dies during the twenty-year period the remainder of the twenty-year payments will be made to a beneficiary. If the annuitant lives longer than twenty years he or she will continue to receive payments for his or her lifetime. The guaranteed monthly payments will be less than "life only", and "Life with 10 years certain."

Why buy an annuity?

An annuity is a good investment option for individuals who are willing to take a bigger risk in hopes of earning a bigger payout. Your earnings can then be used for supplemental income during retirement, guaranteed financial independence as you age, or a monetary legacy to leave behind for your loved ones. An annuity can help you continue living comfortably well into old age.

Contact us at 1-800-676-1804 or at 954-572-1452 to learn more about planning your future with an annuity. We are happy to answer your questions and help begin your investment process today.

   

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