Annuities

Annuities have been in existence for well over two hundred years.  The very first mention of Annuities in the United States was the use of these products by the Presbyterian Church in 1740 to provide security for the clergy and widows.  Annuities allow you to accumulate tax-deferred funds for retirement and then, if you desire, receive a guaranteed income (this process is called Annuitization) payable for life or for a specified period of time: generally a term of five or ten years.

Annuities are offered by Insurance companies and sold through licensed agents.  The insurance company must be evaluated and licensed in your state as does the agent.  State insurance commissions scrutinize Insurance companies to ensure they have reserve funds, commonly referred to as State Legal Reserve Pools, in place to protect investors before granting insurance companies licenses.  If an insurance company goes out of business other insurance companies licensed in state must assume bankrupt insurers obligations and liabilities.  Note that this protection protects fixed-rate annuity holders only, with some protection afforded to variable annuity owners.

Annuities are very similar to CDs offered by banks.  Just like banks insurance companies offer different rates and returns on annuity investments.

Advantages of Annuities

All annuities have three primary advantages: Tax Deferral, Avoidance of Probate, and a Guaranteed Income (optional) for a fixed period of time, or income for life.

More specific reasons to invest in fixed and immediate annuities:

• You need to safely create wealth for your heirs
• You need tax-deferred growth
• You need your principal and interest guaranteed
• You need your heirs to avoid probate upon your death
• You need an increased death benefit
• You need stock-market linked gains without the downside risk
• You have money that is designated for inheritance
• You do not need more than 10% liquidity annually

Why Should I Consider Purchasing an Annuity?

Annuities can serve many useful purposes.

If you are in a saving-money stage of life, a deferred annuity can:

• Help you meet your retirement income goals. Employer-sponsored plans such as a 401(k), 403(b) or Keogh are an important part of planning for retirement. However, contributions to these plans and to IRAs are limited, and they might not add up to enough for the retirement income you need, especially if you started saving for retirement late or had contributions interrupted—perhaps due to job changes and/or family responsibilities. Moreover, your social security and defined-benefit pension (if you have one) may provide less than you need to retire. Remember that the purchasing power of defined-benefit pension income is eroded by inflation.
  
• Help you diversify your investment portfolio. Investment experts routinely advise that, to get the best return for a given level of risk, you should diversify your investments among a number of asset classes. Fixed annuities, in particular, offer a unique asset class—an investment that is guaranteed not to decrease and that will actually increase at a specified interest rate (and, often, potentially more). The guarantees are supported by the claims-paying ability of the insurer.

• Help you manage your investment portfolio. Investment experts routinely advise that, whenever your investments in various asset classes get too far from the percentage allocations you prefer, you “rebalance” to the original formulation, by shifting funds from the classes that have grown faster to the ones that have grown more slowly. If you do this with mutual funds, you pay capital gains taxes; if you do it in a variable annuity, you don’t pay capital gains taxes. When you eventually withdraw money from the annuity (which could be many years after the rebalancing), you pay tax then at the ordinary income rate.

If you are in a need-income stage of life, an immediate annuity can:

• Help protect you against outliving your assets. Social security pays retirement income for as long as you live, as do defined-benefit pension plans. But the only other source of income available that continues indefinitely is an immediate annuity.
• Help protect your assets from creditors. Generally the most that creditors can access is the payments from an immediate annuity as they’re made, since the money you gave the insurance company now belongs to the company. Some state statutes and court decisions also protect some or all of the payments from those annuities.

Source: Insurance Information Institute

Annuity Frequently Asked Questions

Q.  What is an Annuity?

A.  An Annuity is a contract which makes payments to you at regular intervals based on premiums that you pay for the contract.  The main reason to buy an annuity contract is to obtain an income, usually for retirement purposes.  You can buy annuity contracts from life insurance and other financial services companies.  Annuity income payments are often made monthly, although other frequencies are available.  An annuity contract is not a life insurance policy or a health insurance policy.  It is not a savings account or savings certificate, nor should it be bought for short-term purposes.

Q.  How does an annuity contract work?

A.  The value of the annuity contract consists of the premiums you have paid, less charges, less any amounts withdrawn, plus interest credited.  The interest rate used to accumulate contract values may never be less than the guaranteed rate stated in the contract.

In practice, the interest rate actually used by a company, usually referred to as the “current” rate, is often higher than the guaranteed rate and can change from time to time. Companies determine the interest rate they use based on current economic conditions, such as the performance of U. S. Treasury or Corporate Bonds.

Q.  Are there any charges that will affect the value of my annuity?

A.  Annuity contracts have a surrender charge.  This charge is usually a percentage of the value of the contract, or of premiums paid, and takes effect if you withdraw the full or partial value of the contract.   The percentage may be reduced or eliminated after the contract has been in force for a certain number of years.

Q.  How much income will I receive from my annuity?

A.  The amount of each annuity payment is determined when payments begin.  Annuity payments are based on both the value of the contract and the contract’s “benefit rate” when the annuity payments start.  The benefit rate depends on your age, gender and the annuity payment option you have chosen.

Q.  How long will I continue to receive annuity payments?

A.  The length of time over which annuity payments are made depends on the annuity payment option you choose.  The most commonly available annuity payment options are:

• Straight Life:  This option provides payments to you as long as you are alive.  There are no further payments to anyone after your death.
• Life with Period Certain:  This option will pay you as long as you are alive.  If you die before the end of the period referred to as the “certain period,” the annuity will be paid to your beneficiary for the rest of that period.  Typical certain periods are 10 to 20 years.
• Joint and Survivor:  This option will be paid as long as either you or another named annuitant is still alive.  In some variations, the annuity is decreased after the first death.  A period certain may also be available with this option.

Q.  Are there other benefits with an annuity contract?

A.  Death Benefit:  Most contracts provide that is you die before the annuity payments start, the contract value will be paid to your beneficiary.  Some contracts provide that the death benefit will be the total premium paid if that amount is greater than the value of the contract at death.

Surrender Benefit:  Most annuity contracts allow you to surrender your contract if annuity payments to you have not yet started.  Upon surrender, the contract terminates.  The surrender benefit is equal to your contract value, less surrender chargers, if any.