What Is a Deferred Annuity?

Deferred Annuities Explained

Deferred annuities mean that you are purchasing a contract and deferring income, payments or profits. Consequently, this is before you choose to do something with it. This may involve a stream of payments at a later date. Most noteworthy, most fixed and index annuities are deferred annuities.

A deferred annuity is a type of annuity contract that delays payments of income, installments, or a lump sum until the investor elects to receive them and the contract is out of surrender. This type of annuity has two main phases: the savings phase also called the accumulation phase. These can include Fixed Annuities and Index Annuities. The second phase is usually the income phase, if you want this or if you have purchased a rider. Deferred annuities are variable annuity, index annuity or fixed annuity.

A Flexible Premium vs. A Single Premium

Flexible premium annuities allow for multiple purchase payments, sometime this extents the term of the contract but the carriers we deal with will not extend the term of the index annuity. An example of this is if you purchased a 7 year index annuity and wanted to add money to it in 2 years, you would only have 5 years left for all the money, even the new money to be out of surrender. While a single premium annuity requires one lump-sum purchase payment.

Single-Premium Annuities

Purchase these with one lump-sum premium payment such as, 401(k) or IRA rollover. Some single-premium annuities do accept additional premiums during a short, specified time period at the beginning of the contract.

How Much Money Do I Need To Buy An Annuity

What is The Minimum Amount of Money Needed to Buy a Fixed or Index Annuity?

Most annuities have minimum buy amounts and may or may not allow multiple payments. Most single premium annuities start at $10,000 or $25,000. You can also buy a better rate for amounts over $100,000 or $250,000.

You can buy flexible premium annuities. These offer a payroll deduction with minimum purchase payment requirements of $100. Depending on the product, there are annuities that need a single lump sum with a certain minimum requirement.

I like the flexible premium annuities that allow you to add money as you see fit. When the stock market is up, it is a great time to peel off some of those profits and add them to your index annuity, that can’t go down. Also by using the penalty free liquidity you can pull up to 10% (with most carriers), so when the market has had a pull back its a great time to pull money from the annuity and add it back into the market.

How Do I Know If An Insurance Company Is Creditable?

What To Look For In A Fixed Annuity When It Comes To Ratings

How do I know the insurance company is creditable?

There are about 50 insurance carriers, but ONLY 12 investable. If an AM Best Rating is below an A-, it would be advisable to disregard any investment or long term relationship with them.

Here are two rating companies to research when you are trying to find the best annuities to purchase.

A.M. Best

Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the insurance industry. Contract owners refer to Best’s ratings and analysis as a means of assessing the financial strength and creditworthiness of risk-bearing entities and investment vehicles.

ONLY WORK WITH CARRIERS THAT ARE A- or HIGHER

What is the Comdex Ranking of your insurance company?

AM Best, Fitch, Moody’s and S&P. The Comdex is not in reality a rating but rather a ranking based on the average of all the different ratings these different organizations give an insurance company. The Comdex rating is on a number scale of 1 to 100with a higher number being the better ranking. A good rule of thumb is 80% or higher.

When Is An Annuity Appropriate?

It is important to understand that annuities can be an appropriate tool if used properly by you and your advisor. Annuity contributions are not tax deductible. That’s why most experts advise funding other retirement plans first. If you have already contributed the maximum allowable amount to other available retirement plans, however, an annuity can be an excellent choice. There is no investment limit to your annuity. Like other retirement plans, the funds are allowed to grow tax deferred until you begin taking distributions.

Annuities are designed to be a long-term investment vehicle. In most cases, you’ll pay a penalty for early withdrawals. If you take a lump sum distribution of your annuity funds within the first few years after purchasing your annuity, you may be subject to surrender charges imposed by the issuer. An annuity is worth considering if you are certain that you won’t need the invested money until AFTER age 59½. If your needs are more short term, you should explore other options. Most contracts are 5-10 years, we DO NOT recommend purchasing an annuity that is longer than 10 years.

These are just a few of the important questions to consider as you evaluate what is necessary for a happy and prosperous financial future. These questions may seem a bit overwhelming, but remember you don’t have to figure out all the answers alone.

As you approach retirement planning, you may have the following questions:

Are you on the right course to achieve your future financial goals?
What are your dreams for retirement?
Have you sufficiently planned your spending needs and wants?
Do you have a professional (financial advisor) to offer support and guidance?

What Are Index Annuities, Equity Index Annuities, or Fixed Index Annuities?

Investments That Earn Interest

A fixed-indexed annuity gives you the opportunity to earn interest at an interest rate that is determined according to a formula based on the change of a referenced index. The rate is not guaranteed like a fixed annuity. Some of the credit you get (the interest rate) is determined partially by investment-based index reference, such as a Standard & Poor’s 500® index or the NASDAQ index.

Participate In Gains: The Rising Financial Market

As interest is credited, the earnings are locked into the account value. Additionally, the account will not participate in any losses the index may reach. An index annuity offers the ability to participate in some gains associated with a rising financial market while at the same time providing the security and guarantees similar to those associated with traditional fixed annuities.

As you consider a fixed-indexed annuity, acknowledge the following:

Regardless of index performance, you won’t lose money unless you withdraw money or surrender your annuity during the early withdrawal period.
Interest is credited to your annuity at the end of each one-year term.
Fixed-indexed annuities can be flexible or single premium.
Many fixed-indexed annuities offer riders that can provide guaranteed income for life or additional death benefit options for your beneficiaries. Extra annual charges apply for these riders

Index-based interest up to the initial rate cap (called a cap rate). This is the most you can earn every year.
Renewal cap rates are assigned every year.

For example, let’s assume you have a 5% cap:

If the “index” is up 12%, you get 5%.
How about an “index” that is up 3%? You take 3% credited to your account.
You have an “index” that is DOWN -20% you would take a 0, nothing would happen to your account value.
Always include a minimum cap rate- make sure you confirm what this is, it could 1% it could be 3% it could be .25%.

An adviser will get you the “published renewal rates” of past contracts with that insurance carrier. This is a great guild in determining credibility. Some carriers would not give this information out. If you bought the product in 2013 and purchased a 5% cap, for example, did the insurance carrier drop the rate to 4% the second year or keep it at 5%. How about 2015 and 2016? These are reasonable questions to ask. If you want us to pull this information for you because you have an advisor, we are more then happy to help you.

What Exactly Is A Fixed Annuity?

What Are Fixed Annuities And How Do They Work?

A fixed annuity gives you the stability of a fixed interest rate. Hence, it is guaranteed never to drop below a minimum interest rate. This is an interest rate determined by the company, therefore, it is on the contract when you buy the fixed annuity. A lot of people that buy C.D.’s or bonds, however, they end up moving to a fixed annuity. Therefore, they then get the tax deferral and the higher rate.

Benefits of fixed annuities could include these items below. Please also consider the items in bold font:

Credited interest to your daily account (make sure this is the case)
Terms are usually 3,5,7 and max of 10 years. Most advisors only recommend going 3-5 years typically.
This interest rate should be LOCKED for the term of the contract. We do not encourage the first year rate to be extremely high before dropping the rate the next year.
Some have a minimum of 1% after the first year. We do not support this… Be careful of these products.
Check with your advisor on liquidity. Some insurance companies will only allow you to take a withdrawal of the interest payments. Some will allow you access to up to 10% per year and one will allow you up to 15%.
Check that the liquidity (allowed amount you can access) could be based on the initial purchase amount (the premium) or it can be calculated off the account balance. We like the account balance, it gives you access to more.
If you would like to pull your interest from the fixed annuity, make sure the carrier can make a direct deposit in your account on a monthly or quarterly or yearly basis.

What Are Fixed and Index Annuities and How Do They Work?

What is An Ordinary Annuity?

Per Wikipedia “An annuity is a series of equal payments at regular intervals. Examples of annuities are regular deposits to a savings account, monthly home mortgage payments, monthly insurance payments and pension payments.” This is partially true. On this site you will find reasons to invest in fixed and indexed annuities, what are the basics you need to know about (annuities for dummies) and what are the fees in an annuity.

Why Invest in An Annuity?

Life insurance companies first developed annuities to provide income to individuals during their retirement years. An annuity is a contract between you, the purchaser/owner and the insurance company. As a result, you pay money to an annuity issuer/carrier and consequently get some rate of return on your money.

Most noteworthy, at the end of the accumulation phase, you can choose to withdraw money. You may also have the insurance carrier pay out the principal and earnings back to you. This can also go to a named beneficiary over a period of time. You may choose to receive those payments immediately or defer them to some date in the future.

Your Retirement Plan

Annuity is similar to a qualified retirement plan in several ways. Tax deferment applied to your earnings continue until you begin to receive payments back from the annuity issuer. Over a period of time, your investment in an annuity can grow substantially larger than a comparable taxable investment.

A tax penalty of 10% applies if you begin withdrawals from an annuity before age 59½. Unlike a qualified retirement plan, however, contributions to an annuity are not tax deductible and taxes are only paid on the earnings when distributed.

The defining characteristic of any annuity is the option to receive the payments as guaranteed income for the rest of your life. Even if the account value goes to zero, the insurance carrier will still pay what was agreed upon.

What Age Ranges Can I Buy An Annuity?

Usually you can buy an annuity from ages 18-90, but remember this is an insurance product so you can not pull your money before age 59 ½.

Early withdrawal results in a 10% penalty on just the gains you made. If you buy an annuity in your 30’s you can “roll them” or 1035 them into another annuity and defer taxes. Most income riders can only be purchased at age 50 and older. Most companies will not allow you to buy an annuity after the age of 85. There are a few carriers that will issue up to age 90.

Where Are Annuities Bought?

Financial company or insurance outlets sell fixed annuities. Some pay in a lump sum from their savings (single premium), while others pay in small portions until the agreed amount is acquired. This is called a flexible premium.

The investment earns a guaranteed fixed rate through the accumulation stage. As the money is paid, the remaining money in the account will continue to gather and earn interest based on the contract. This interest can be derived from a fixed rate (Fixed Annuity) or based off an index, most commonly the S&P 500 or through mutual funds (sub accounts inside of a variable annuity).

Money grows during the accumulation phase. This is an advantage that fixed annuities have over other forms of investment. The penalties, taxes, and fees are used to discourage premature withdrawal in order for it accumulate with time. Special occasions, however, may require you to request the funds beforehand.

Some people compare fixed annuities to mutual funds, but there are no similarities. Index and Fixed annuities are close to C.D.’s and bonds are not like mutual funds or equities.

When is an annuity appropriate?

It is important to understand that annuities can be an excellent tool if used properly by you and your adviser. Annuity contributions are not tax deductible. That’s why most experts advise funding other retirement plans first. If you have already contributed the maximum allowable amount to other available retirement plans, however, an annuity can be an excellent choice. There is no investment limit to your annuity. The funds grow tax deferred until you begin taking distributions.

Long Term Investment

Annuities act as a long-term investment vehicle. In most cases, you’ll pay a penalty for early withdrawals. If you take a lump sum distribution of your annuity funds within the first few years after purchasing your annuity, you may be subject to surrender charges imposed by the issuer. An annuity is worth considering if you are certain that you won’t need the invested money until after age 59 1/2. If your needs are more short term, you should explore other options. Most contracts are 5-10 years, we do not recommend purchasing an annuity that is longer than 10 years.

Do You Have Questions About Retirement?

As you approach retirement planning, you may have the following questions:

Are you on the right course to achieve your future financial goals?
What are your dreams for retirement?
Have you sufficiently planned your spending needs and wants?
Do you have a professional (financial adviser) to offer support and guidance?

Advantages of annuity ownership

Tax-Deferred Growth. One of the greatest benefits of a fixed or fixed-indexed annuity is that the interest credited to your annuity is completely untouched by current federal income tax during the accumulation period. Interest compounds and the account grows at a faster rate as a result of tax deferral. Compound interest is calculated not only on the initial principal, but also on the accumulated interest of prior periods.

You can continue the tax deferment by “rolling” the account value of the annuity to another annuity. This is known as a is 1035 exchange. If you have questions on this, please contact us by filling out the form and one of our financial advisers will contact you about your NEEDS and not a product offering.

Protection for your family

An annuity can serve as an effective estate planning tool since it distributes the remaining contract value to your beneficiaries without going through probate. Some of our annuities also have some additional features that help you protect your assets.

The Parties Involved In An Annuity Contract

There are four parties to an annuity contract.

The annuity issuer (the insurance carrier)
Owner (The annuitant)
Beneficiary.

The annuity issuer is the company (e.g., an insurance company) that issues the annuity. The owner is the individual or other entity who buys the annuity from the annuity issuer. The buyer makes the contributions to the annuity (owner can be a non-profit company, trust, or individual). ‘Annuitant’ refers to the individual whose life will be used as the measuring life for determining the timing and amount of distribution benefits that will be paid. The owner and the annuitant are usually the same person, but not necessarily. Finally, the beneficiary is the person who receives a death benefit from the annuity at the death of the annuitant.

What are the charges for an annuity?

Most annuities do not charge up-front sales charges, but have charges if you withdraw money before the end of a stated period. Fixed and fixed-indexed annuities do not have administrative fees. Although interest crediting rates take into account expenses related to the product. Variable annuities may involve ongoing maintenance and administrative fees to provide guaranteed death benefits and cover expenses related to the product. When purchasing a variable annuity, information regarding contract charges in the contract’s prospectus is available.