Category Archives: Annuity Riders

Annuities, what is the difference between a Variable Annuity and a Fixed Index Annuity?

What is an annuity?

To understand how they work first you need to understand what an annuity is. In simplest terms, an annuity is designed as a long-term investment that grows tax-free (or tax-deferred) and can help you not outlive your income. It’s a contract between yourself and the insurance company that you choose for your annuity. 

You can either make a single lump-sum payment to the company or a series of payments over some time. If you have questions about this, we are here to help.

Now that we’ve got the basics out of the way, there are three main types of annuities to choose from:  fixed annuities, indexed annuity, and variable annuities.

Fixed Annuity: Fixed annuities by design help you reach your goals and they provide a guaranteed return for a set period of time. When deciding on a fixed annuity, you invest a certain amount up front to the insurance company. The insurance company would then guarantee a rate of interest over a specific period of time. Most fixed annuities are between 3 and 6 years.  We would not advise you to buy a fixed annuity past 6 years. 

Indexed Annuity: Fixed-indexed annuities are kind of a mix between a standard fixed annuity and a variable annuity. They offer a minimum guarantee of the interest rate plus a return that is linked to the market index (provided that the market is doing well). The good news is you can not lose any money, your account value can not go down. For example, if/when the stock market drops 30% this year, you will lose ZERO.

Variable Annuity: A variable annuity is a deferred annuity that allows you to participate in investment funds, such as bond mutual funds or stocks. It can be very volatile and usually comes with some pretty hefty service fees. 

Today, I’d like to take a look at the difference between variable annuities and indexed annuities. Let’s start with the fees associated with each.

Variable Annuity: Annuity account fee, mortality fee, investment fees, surrender fees, early withdrawal fees, and possible additional rider fees (read your contract!) These fees can cost you anywhere from 3 to 4% per year. 

“The truth is there usually is a big price to pay when it comes to variable annuities. The biggest drawbacks include the fees and the potential to lose value based on the performance of the subaccounts invested in the stock market.”-Alin Lozada with Forbes on variable annuities. 

Fixed Indexed Annuity: Fixed index fees are much lower, while they could be up to 1.25% of the account’s annual value they are optional depending on if you would like to add a rider onto your annuity such as an income rider.
A variable annuity can be extremely volatile. While there is a possibility of higher returns and greater income than fixed Indexed annuities, there is also substantial room for loss. A variable annuity is basically like investing in the stock market, with additional fees associated with it. The only real difference is that the taxes would be deferred in the annuity. 


With an Indexed Annuity, although your balance is related to the stock market, your money isn’t at such a risk. When you first purchase an indexed annuity, the value of the chosen index is taken into account. Upon your contract anniversary date, if the index value is higher than when you first opened the account your annuity will be credited a percentage increase. If the index loses value and goes down, your original interest percentage will remain the same (no loss to you). 

Here is a look at an index annuity and how you lock in your gains and avoid the downfalls of the market.

variable annuity and fixed annuity


For a comparison of Fixed Annuities vs. Index Annuities please see the blog post.

Have additional questions? We are here to help you! You don’t need to be a current client of ours to get assistance. Please call us at  (731)207-8548 or send us an email for further assistance.

Tax-Free Retirement: 1035 Exchange Explained

1035 exchange annuity

1035 exchange  annuity can be very beneficial when it comes to planning your retirement, especially, if you are searching for a way to generate a guaranteed stream of income. 

While annuities can play a vital role in executing a well-rounded estate plan, if at some point you decide you need to switch one annuity for another, you can do so without accruing any tax utilizing an annuity income tax treatment known as the 1035 exchange. Using a 1035 exchange, you’ll be able to customize your benefits on your terms, to get you closer to your goals of a tax-free retirement. 

1035 Exchange Defined:

  • A 1035 exchange is a legal way to exchange one insurance policy, annuity, endowment or long-term care product of like kind without triggering tax on any investment gains associated with the original contract. The IRS allows these exchanges under Section 1035 of the Internal Revenue Code.

However, this does not mean the exchange is completely tax-free. If, indeed, the annuity payments are considered taxable, then that retirement annuity tax will be deferred until your benefit payments begin. A 1035 exchange can be very useful if you decide later on down the road that the annuity you have no longer fits your retirement needs.

What are the Advantages of Using a 1035 Exchange?

The primary benefit of exercising a 1035 exchange to alter your life insurance policy or annuity choices is to defer unnecessary taxes on those transactions. 

A 1035 Exchange May Be Right for You If:

  • You need a completely different type of annuity
  • You need more life insurance coverage than you currently have
  • You want to change the type of life insurance policy you have
  • You’re looking for an annuity contract with lower fees
  • You want to restructure your annuity payments 

How Does a 1035 Exchange Work?

If you have an annuity or life insurance policy, you could replace either one with a new annuity contract or insurance policy. In the case of an annuity, the annuitant or person receiving payments from the annuity must remain the same. However, with a life insurance exchange, while you would continue as the insured, you could alter the beneficiary on the policy.

At the time of exchange, no taxes are accrued on the investment gains associated with swapping out the contracts. 

However, there are a couple of rules the IRS requires you to follow:

  • When a 1035 exchange involves life insurance, it must be an even trade. This means when swapping out your old policy for a new one, you can’t simply cash out the old policy and use the money to buy a new one.
  • You can exchange life insurance for life insurance or life insurance for a non-qualified annuity. However, you cannot exchange a non-qualified annuity for a life insurance policy. In addition, life insurance policies and non-qualified annuities may be exchanged for traditional and hybrid qualified long-term care products.
  • In the event you were to surrender your life insurance policy, without going through a 1035 exchange, any gains associated with your original contract will be considered ordinary taxable income. 

By exchanging contracts within the guidelines set by the IRS you won’t have to worry about those changes increasing your taxes. However, in some cases, to trade one annuity contract or life insurance policy for another, you may be required to pay a surrender charge.  The team at Tennessee Annuity Rates can help you navigate this exchange and confirm it is the best option for you. 

 

  • A surrender charge is a penalty fee for canceling your contract with the original insurance company or annuity provider. Surrender Charges can be billed as a flat fee or as a percentage of the amount paid into the contract. These fees vary by company in terms of how much they are and when you will have to pay them. 
  • If you’re exchanging policies or contracts within the same company, It’s possible that the company may waive any surrender charges. However, if you are moving your policy or contract to a brand-new company, you will want to factor in the surrender charge as part of the exchange process or confirm you are out of surrender. 

What Should You Consider Before Initiating a 1035 Exchange?

Before considering any life insurance exchange, ask your agent these questions:

  • Will my current health status affect my ability to qualify for a new policy?
  • Will my premiums increase based on my current age or health?
  • Will a new policy offer a better death benefit or additional features, such as accelerated death benefit or long-term care riders?
  • What is the waiting period for the new policy before death benefits can be paid?
  • Are there any outstanding loans on the policy that would need to be repaid before an exchange can be made?

 

Before considering an annuity exchange, ask your agent these questions:

  • Will a new annuity be more cost-effective in terms of lower fees?
  • Will the structure of my annuity payments change?
  • Does a new annuity offer the potential for better investment returns?
  • Does an annuity still fit my estate and retirement planning needs?
  • Will I pay a surrender fee to exchange annuities?

**It is crucial, when exchanging life insurance or annuities that you remain the owner of the policy or contract. If the ownership should change, the 1035 exchange tax rules no longer apply.

The good news is that the team at Tennessee Annuity Rates is here to help. We can help you not only shop your options but give you suggestions on what are the best options to match your needs. Contact us today.

7 Questions to Ask Before Buying an Annuity

What to Ask Before You Buy an Annuity

Many people reaching retirement are looking for ways to improve their financial security.

It is unsurprising that many people are considering buying an annuity.

If chosen well, an annuity can prevent a person from outliving their finances. What’s more, it can provide increased protection against a volatile stock market.

As annuity will convert current wealth into a steady income, it is vital to make an informed decision.

Also, as life insurance and annuity scams are on the rise, an investor should not rush into a plan.

So, it is important to ask yourself the following seven questions when buying an annuity.

1. What is the Annuity Process?

An annuity is a big financial commitment, so you must have a firm grasp of the process.

You will be buying an insurance product, so you will need to pay one lump sum or make a series of payments.

Once you have made the payment(s), your money will start to grow at either a fixed or variable interest rate.

The insurer will then make regular payments to your account for the rest of your life.

The insurance should also entitle your chosen beneficiary to the amount. Your loved one will either receive the annuity value or the guaranteed minimum, whichever is the greater amount.

The annuity contract is a big commitment. You’ll be unable to withdraw the money until you’re 59 1/2 years old.

If you do choose to withdraw the amount, you’ll experience a penalty of 10% on the lump sum. You may also have to pay a surrender fee.

2. What are the Different Types of Annuities?

Not all annuity contracts are the same. Deferred annuities may fall into 1 of 3 brackets: fixed, variable or equity-indexed.

Fixed annuities will provide a guaranteed rate of return for a select period. You may choose between one to ten years.

While the rates might be subject to fluctuation, you are guaranteed to receive the fixed rate.

It’s one way to ensure you will not lose any money, but you will not have any room to grow your finances.

Variable annuities offer a little more flexibility, so they can also be a little riskier.

The contract is not dissimilar to investing in a mutual fund. While there is a potential to enjoy financial growth, it can also result in the plummeting of the pot.

You’ll also, more than likely, pay higher fees. The beneficiary will also owe tax on the amount.

An equity-indexed annuity is a little like a fixed annuity, as you will receive a fixed payment.

The difference is a contract can provide room for financial growth, as it’s attached to an index.

3. How Many Annuities Should I Buy?

The annuity should provide a stable income that provides you with basic living needs.

Identify how much money you’ll spend on housing, utilities, food, and transportation. You should also factor in healthcare costs, too.

You could even opt for deferred Social Security claims, so this covers your basic needs.

The annuity could then provide a supplementary income. So you can buy vacations, gifts, or home improvements.

4. What Age Should I Start Buying an Annuity?

There is nothing wrong with planning for your retirement early.

Most annuities are often aimed at people in their 50s or 60s, as they are close to retirement age.

As well as your age, you should also take a look at the market before you buy an annuity.

Annuities often have a low-interest rate, so it’s best to take out a contract when interest rates jump.

However, don’t wait too long or you could end up with no stable source at all.

5. What is the Surrender Period?

Before you embark with an annuity contract, take a look at the surrender period.

This is the length of time you will have to keep the contract before you can make a withdrawal without surrender charges.

Most contracts provide a distribution level from 5 to 15% of the initial investment sum.

You can access this on an annual basis without a surrender fee.

Should you exceed the designated withdrawal sum, you will receive a 5 to 15% charge. This charge will most likely decrease the longer you have had the contract.

It is not uncommon for investors to become frustrated that they cannot access their cash.

That’s why it is important to remember an annuity is not a cash resource. It aims to provide financial security.

6. Will Annuity Benefit My Partner?

It’s natural for married couples to consider their partner when buying an annuity.

You might be glad to learn you can invest in the protection with your partner in mind.

Most reputable insurers will provide joint-and-survivor coverage. This will allow you to buy protection at a varying rate, which will be payable to a survivor.

You may be able to choose from 50%, 66% or 100%. What’s more, the initial annuity payments might be lower compared to single-life contracts.

The investment may offer peace of mind that a partner will have financial protection.

7. How Does Inflation Work?

The inflation rate will determine the amount of money you will receive.

Many people will often take out inflation protection when buying an annuity. This can increase the payments with the rate of the consumer price index or an annual set percentage.

Inflation protection isn’t cheap, though.

Compare the market expectation of inflation against the inflation protection cost.

If the market projects a 2% inflation rise, receive an SPIA quote that has an annual 2% set up. You can then compare it against the same income with an annuity adjusted for inflation.

You can then identify the protection markup against an unexpected inflation rise.

Conclusion

Buying an annuity should never be undertaken without making an informed choice.

It is a big financial decision that could impact your retirement years.

You must explore all avenues before making such a big commitment, or you may literally pay the price.

So, only contact reputable insurance providers and consider inflation with care.

You must also factor in your beneficiary or spouse to ensure they’re protected when you die.

Have you taken out an annuity contract? Do you have any advice to share? Leave a comment below.

What Happens If I Die Before I Begin To Receive Payments From My Annuity?

What Happens If I Die Before I Begin To Receive Payments From My Annuity?

In the unfortunate event of the contract owner’s death before income payments begin, the beneficiary may receive a death benefit from the annuity.

In some contracts, the death benefit will be based on the account value. Other contracts use the surrender value or other applicable contract value to calculate the death benefit. What if you have a spouse? Does he or she have inherent rights? 

If your spouse is the surviving joint owner or sole beneficiary, then he/she may have the ownership rights with all rights and privileges of the original owner, as allowed by IRS regulations.

Retirement Income: What Is A Joint And Survivor Annuity?

Retirement Income

An income rider is a critical consideration. It allows you to choose insurance for the husband and/or the wife (some carriers will insurance both partners). Remember, the reason you would buy this would be for retirement. Consequently, it is the best time to buy a joint and survivor annuity.

Buying A Joint & Survivor Annuity

Annuity payments are received over one’s lifetime and another individual’s lifetime. The annuity issuer promises to pay an amount on a periodic basis (monthly, quarterly, or yearly). The amount received for each payment period will be the same while at least one person is alive. If it is a husband and wife and the husband passes away, for example,  than the wife continues to get the same income stream. 

Retirement Income: What Is A Joint And Survivor Annuity?

How Do Income Rider Investments Work With Annuities?

If you are close to retiring or looking for safe investments that do not relate to the stock market, then this opportunity might be useful for you. This site should give you an overview of how income riders work with index annuities. Clients often ask us, “how am I going to pay for the things I need when I retire?” We want you to financially survive during your retirement years. This arrangement with the insurance carrier will ensure your financial life is not negatively affected when you retire.

Social Security and employer-sponsored pension plans may only provide a portion of the income you will need down the road. It’s never too soon to carefully consider the future of your retirement nest egg.

QUICK MATH:

Add up your expenses, the NEEDS.

  • Housing
  • Taxes
  • Utilities
  • Insurance
  • Meals and Entertainment
  • Medical Expenses

Let’s assume this totals $52,000 per year.  If your social security is $22,000 per year. Then the difference is $30,000 per year. How will you generate this income? Working part time, dividends, a blend of both. You could purchase an index annuity with an income rider to cover the majority of that $30,000 gap you have. Maybe you choose to cover $20,000 with the annuity and allow dividends to cover the other $10,000. We are happy to connect you with one of our financial advisers who can run an in depth plan that is tailored to you for free.

 

What is an income rider?

Income riders have improved over the past 5-10 years. The products are improving, but it still depends on the company and the adviser that sells you the product. Some firms mandate that the income rider is fair for the consumers, but most don’t care to consider the consumers concerns and financial stability.. If you do not use one of our advisers that you look at the same product through different brokers just to confirm you are getting the best terms. We notice that purchased products often do not support the client’s needs. We are NOT okay with this!

If you have an annuity with an income rider and you have either not turned it on or  just turned it on, you should have it reviewed as soon as possible. Most of the time you can LOWER your fees from 3-4% to 1% and get 10-30% more income!