Tax-Free Retirement: 1035 Exchange Explained

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 .

Should I Allocate Retirement Savings Into An Annuity?

Allocate Retirement Savings

Want to augment your retirement savings with a steady stream of income? You might want to consider devoting a portion of your savings into an annuity.

An annuity is a contract between you and an insurance company. You can make either a lump-sum payment or a series of payments. In return, you receive regular disbursements either within a month or at some time in the future. There are different types of annuities, but all fall under the two major categories: Deferred and Immediate.

With an Immediate Annuity, you can start receiving your payments within 30 days after your initial investment. A Deferred Annuity is different, however. Your money is invested for a period of time until you are ready to start receiving disbursements. Most deferred annuities are associated with retirement income. You can invest a lump sum or build up funds over time by contributing on a monthly basis. This way, you can then “annuitize” or convert, that amount into an income stream.

Many people ask whether it’s important to allocate their retirement savings into an annuity. Unless you opt to live an incredibly frugal lifestyle, it’s likely that you’ll need an annuity to meet your retirement income goals. Read on for why.

Why Do I Need An Annuity To Supplement My Retirement Savings?

The dream of every retiree is to maximize their lifetime income and reduce the risk of running out of money. First, define your preferred asset allocation. Think about how much to invest in stocks and bonds, and leave room for adjustments. The changes might involve taking a portion of your portfolio and investing in a Deferred Annuity.

Instead of retaining a portfolio mix of 40% stock and 60% bonds, you can adjust it to create room for Index annuities. Consider a portfolio comprised of 50-60% stocks/mutual funds, 30% Index Annuity, and then the difference in cash. Annuities are attractive to many investors because they provide a way to build tax-deferred savings. They also reduce the risk of running out of money by generating a steady flow of income.

Annuities Protect Your Retirement Savings

Just like a portfolio of stocks and bonds, annuities have the characteristics of standard investments. What sets them apart? Annuities come with insurance features. They help you reduce or transfer the risk of investing part of your portfolio to an insurer. Consequently, allocating some of your money to an annuity offers some insulation from the uncertainties surrounding the stock market.

Your primary goal is to have a guaranteed stream of income (more than what Social Security alone can provide) in retirement. Consider allocating some of your savings to an annuity. Research shows that investors who have an annuity tend to be happier in retirement. Annuities are a guaranteed pension-like income supply.

Do be careful when selecting your annuity. Some annuities come with high fees. These can cut your returns in the long run. Others charge penalties for early withdrawals and most of them are damn complicated.

How Much Of My Retirement Savings Should I Allocate To An Annuity?

No rule will tell you the percentage of one’s savings that should be put into an annuity.

Even if such a rule existed, you wouldn’t be obliged to follow it. The amount to save is based on a strategy tailored to your financial goals. To come up with such a strategy, you will first need to know how much your living expenses will be during retirement.

Start by drafting a retirement budget. There are some online tools such as BlackRocks Retirement Expense Worksheet. You can use this to estimate what your retirement expenses will approximately be.

Next, determine how much of your expenses can be paid from your pension and Social Security. Say your pension and Social Security payments are enough to meet all of your retirement expenses. You may not need additional income from an annuity. The withdrawals from your nest egg should be enough to cater for all your living expenses.

However, if you find a huge gap between your living expenses and what pensions and Social Security will pay, then you should consider devoting some of your savings to an annuity. You can use this retirement income calculator from T. Rowe Price to gauge how long your income might last at different withdrawal rates.

What Kind Of Annuity Is Best For Me

If you decide to allocate some of your savings to an annuity, the next question that needs solving is whether to invest in a fixed or a variable annuity.

With fixed annuities, the backing insurance company agrees to pay the investor a fixed rate of interest for the first year. Thereafter, the company can raise or lower the rate but not below a guaranteed minimum. Better even, fixed annuity interest is not taxed until you withdraw the money. Should you choose to withdraw the interest earnings before age 59 1/2, you will pay not only the tax but also a 10% penalty. Upon reaching the age of 59 1/2, you can withdraw 10% of the fixed annuity amount without any penalty. Any withdrawal above 10% of the account’s value could result in a surrender charge payable to the insurance company.

A variable annuity, on the other hand, works like a mutual fund. You can invest in multiple ‘subaccounts’ which can own stocks or a combination of mutual funds and bonds. Unlike fixed annuities, variable annuities have no guaranteed returns because the principal is invested in multiple subaccounts comprising mainly of mutual funds and money market instruments.

Therefore, you get to decide how you want your premiums invested as well as how much risk you are willing to take.

It’s also important to note that subaccount values fluctuate with changes in market conditions. This means that with variable annuities, the principal may be worth less or more than the original amount invested. If you are wary of market fluctuations, you might consider investing in fixed annuities as you can never lose the principal (guaranteed) unless the insurance company fails.

Annuities Can Supplement Your Retirement Savings With Income For Life

Note that the amount you get depends on many factors such as age, the amount you invest, and interest rates.

Despite all their benefits, it’s important first to weigh all the pros and cons to determine whether annuities are your best investment options.

Before investing, it’s advisable to take the advice of an unbiased professional who knows the pros and cons of annuities and other financial instruments.

Should I Purchase an Annuity for Regular Income?

Annuities for Regular Income?

Do you sometimes have trouble with money management? Do you often worry that your regular income isn’t enough to support yourself?

If so, an annuity might help you out.

If you aren’t great with money, an annuity seems very confusing. There are a lot of misconceptions or simply lapses in knowledge that can make understanding annuities very difficult.

Because if this, it can be very hard to figure out whether or not you should purchase an annuity, and whether something like that is the right step for you to take in your financial plan.

Have you had these doubts? If so, you aren’t alone. It’s been found that while 84% of retirees want annuities, only 14% actually buy them.

A lot of this hesitation probably stems from a lack of knowledge, which is understandable. You don’t want to pick something that you don’t understand, especially when it comes to your finances.

Luckily, we’re here to help. Here’s everything you need to know about annuities, and whether or not you should consider them for your regular income.

How Do Annuities Work?

Basically, annuities are for people who are worried about outliving their income.

It works fairly simply. With a DIA (Deferred Immediate Annuity), you buy payments, which are then converted into payments that last for the rest of your life.

There are some annuities that are variable. These can pay out more but are also at a higher chance of risk because you’re investing in mutual funds.

Then there are fixed annuities, which are much less risky but also may not see as much profit.

Annuities are often very personal and specific. We’re here to advise and educate you, based on your unique needs and goals, which annuity will help you reach your ideal financial future.

Things that you should consider when looking to purchase an annuity are your income needs, risk tolerance, and investment objectives. These are all factors that will go into deciding whether or not you wind up using a fixed index or a variable annuity. But some people have more questions when it comes to annuities. Even after learning how they work, some doubts linger.

Is an annuity right for me? What’s the catch?

It’s easy to worry that you aren’t understanding the true risks and rewards of an annuity. That’s why we’re breaking it down a bit further.

What Are The Pros And Cons Of An Annuity?

Like any investment option, annuities come with both pros and cons.

Here are some of the benefits of annuities:

You never have to worry about running out of money after you retire.
Many annuities keep pace with inflation.
It’s less work at an age where you probably don’t want to be doing that sort of thing.

But, of course, there are some cons when it comes to annuities, as well. Here are some things you should watch out for when purchasing annuities:

Not all annuities are created equal. You have to make sure that you’re getting yours from a reputable source.
If you pass away before you get your money’s worth, money that could have gone to your heirs will stay with the annuity company. This is only true if you annuitize your annuity. If you purchase an income rider, your beneficiary will get the account value that’s left in your annuity at the time of your passing.

Like any financial plan, there are some risks involved when it comes to annuities. Knowledge is power and there are a lot of professionals who will keep you from learning so that the sale is easier for them. Ask us. We offer free consultations, so if you have any worries about the risks, we would love to talk with you about them and set your mind at ease.

How Do I Know If An Annuity Is Right For Me?

There are a few things you should consider if you’re thinking about getting an annuity. The first step is to ask why you want an annuity. You should only get it if you think you can really benefit from it. Are you struggling? Worried? Unsure about running out of money during retirement?

These are great reasons to invest in an annuity. Outside of that, though, there are some other factors to take into account. Annuities aren’t for everyone, after all. Financial plans should be unique to your situation. There’s a specific situation that annuities work for, so you need to think carefully.

For example, just how much are you able to dedicate to an annuity? Once you pay for it, there’s no getting that money back, so you have to be very careful. Put too much of your regular income into it, and you’ll wind up struggling. Your age and health are also things to consider. You want to make sure that you’ll live long enough to get the benefit of the annuity. But if you have the money to put away and are in relatively good health, a Fixed Index Annuity might be the perfect step for you to take.

How Do I Get An Annuity For Regular Income?

Now that you’ve carefully considered annuities, their risks and rewards, and whether or not they’re right for your regular income, it’s time to take the next step.

Earlier, we said we’d give a free consultation. And if you’re ready to take that step, we’d be more than happy to help you. We know that each financial situation is unique, so we promise to give you the attention that you deserve when it comes to your financial plan.

Or maybe you’re still unsure about whether or not an annuity is for you.

That’s okay! There’s a reason that so few people have these, despite wanting them. They’re confusing, and if there’s one thing you don’t want to make a misinformed decision on, it’s your finances.

That’s why we are full of tips and tricks when it comes to understanding annuities. If you’re looking to become an expert, look no further than our expert advice!

We want you to be comfortable and confident in your financial future. So if you’re looking for more information on annuities, look no further than our site. We’re glad to help you learn more in any way that we can!

Check or Bet: What To Do With An Annuity

What To Do With An Annuity?

The fastest growing segment of the population are folks 60 and older. How many of these Baby Boomers have set aside enough money to use for the rest of their lives? A third of people over 65 have less than $30,000 in savings when entering retirement.

Is an annuity a good investment option for you? How do you decide to check or bet when it comes to buying annuities?

Here are the top reasons to bet on and check out annuities.

Top Reasons Why You Should Check Or Bet On An Annuity

You’ve Maxed Out Other Retirement Savings Options – Bet

Contributing to a 401(k) and IRA deferrals are a great idea until you reach your max.

Say you’re in a high tax bracket and you’ve maxed out your 401(k). You will be in a lower tax bracket when you retire. In this case, an annuity is a great option for you.

The average fee to have an income rider attached to your Index annuity is about 1%. For example, if you invest $100,000 in an annuity with an income rider, your fee will start off at 1% of $100,000 or $1,000 per year. BUT PLEASE REMEMBER: THAT FEE WILL GO UP EVERY YEAR BASED ON EITHER THE ACCOUNT VALUE GROWING OR, IN MOST CASES, THE BENEFIT BASE GROWING.

You Already Have All the Money You Will Need to Live on For A Long Time – Check

Check or bet? Are you wealthy, have a paid off mansion, and have trusts set up for your children and grandchildren? Pass on an annuity.

You are more than taken care of for the rest of your life and won’t need annuity payments.

You Have Enough Financial Assets to tie up a lot of Money for a Long Time – Bet

If you’re young when you enter into annuities, you won’t have access to your investment for a long time.

Say you come into a chunk of money when you’re 30 and want to invest in an annuity. Can you make it without those funds for another 29 1/2 years? An annuity may be good for a portion of that money.

Have a well-funded savings account and a diversified portfolio to compliment it.

You have a Health Condition That Could Shorten Your Life – Check

Annuity income depends on you surviving past your life savings. A short lifetime due to health concerns makes annuities less attractive investments. You can choose to have a beneficiary on an annuity. They will receive the account balance the day of your death.

There are better options for inheritance that would carry a lighter tax burden. Low-risk investments like mutual funds would be a good option. But an Index Annuity can help you manage the disbursement of those payments after you pass away. For example, if your Index Annuity grew to $100,000 and you passed away, you could dictate to the insurance carrier how your beneficiaries will receive those funds. This means that instead of a lump sum payment to one kid, you could dictate that he receives $1,000 a month until the contract goes to zero.

You are 60 Years Old or Older and Won’t Have Dependable Income in Retirement – Bet

Annuities protect you from outliving your retirement savings. Say you’re near the retirement age, annuities are an even better bet. If you are a healthy 60-year-old man, you could live another 20 years. Are you a woman, another 40? 85% of people over 100 years old are women. Can you afford to live that long? Check or bet? Bet – An annuity can guarantee it.

You are Young and Don’t Already Have an Investment Portfolio – Check

Annuities are a good addition to an already diversified portfolio to cut risk. If you are still young and in the beginning of your career, you have time to invest in higher risk options. Consider investing in mutual funds and stocks first and adding an annuity in your older age. Annuities should supplement the savings and investments you’ve already saved.

You Aren’t Willing To Do Your Own Research – Check

Annuities are confusing.

You need to do your own research and go through the product with a fine tooth comb. Fill out this form and call us. We’re here to help you navigate the annuity waters.

There are consultants who will offer products that carry high commissions but a low value to you. These products are often the most confusing. If you want an easy, straightforward annuity option, you’ve come to the right place. We are industry leading professionals who here to help and educate you.

Other Factors to Keep In Mind When Deciding on Annuities

Tax rates need to be a factor when deciding to check or bet on an annuity.
When the payout starts for the annuity, it will count as regular income. Generally, the capital gains tax rate is 15%. This is the tax you would be facing if cashing in on stock or other investments. This is a consideration that we will discuss while meeting with you. That higher tax rate also gets you the lowest risk. A fixed annuity has a guaranteed payout even if the market fluctuates.

IRA’s and other investments fluctuate with the market. Your investment may be suffering a loss when it gets to crunch time and you need that money. A guaranteed annuity is a great backup plan for these other investments. You will also earn more interest on Fixed Annuities than a savings or money market account.

Riders can make annuities more attractive to those who have decided to check. You can add extended care or terminal illness waivers to cover long term care. If you have a family history or have a condition that may need these services, this rider could be a benefit.

You can add a death benefits rider to make your annuity a better inheritance. These allow for value gains for the beneficiary following your death. While still not the best choice for inheritance, this can make the situation a little better.

Adding these extra products to the annuity you’re looking at can make them a better bet for you. The last thing you want when you are approaching the sunset of your life is to worry about money. Annuities provide a guaranteed source of income which can be comforting. Choosing between different types, different rates, and other options can all become overwhelming.

We want to help provide clarity on your best options for retirement. We want you to be set up with guaranteed income for life. Let us answer your questions and clear up any confusion you may have.

Credit Rating Agencies: Which One Should I Trust?

When you’re looking through different annuity selections with your financial advisor or consultant, knowing which insurance offer to trust makes a big difference. Credit rating agencies rate insurance companies with a grade or percentage. This score assigned to each independent insurance agency indicates that company’s ability to pay policyholders’ claims.

The Big Four: A.M. Best, Comdex, Moody’s, and Standard & Poor’s

Financial rating services such as A.M. Best, Comdex, Moody’s, and Standard & Poor’s rank insurance companies based on their financial strength and stability. Before you invest in an annuity, check that annuity’s insurance provider’s ranking. These financial rating agencies are independent and they all have their own rating scale based on their own standards. Which rating service should you use?

A.M. Best: An A- and Above Means A Solid Insurance Provider

A.M. Best is a financial rating agency whose main focus is on the insurance sector. Only trust an annuity provider whose ranking is an A- or higher. A score of an A- or higher indicates a score of ‘Excellence’. This score means that your insurance company is able to pay you back the principal of your annuity as well as the claimed gain. The insurance company is secure and reliable. Superior scores are “A++” and “A+”. Scores lower than “A-” are vulnerable to economic conditions. Use this as your guide to the reasoning behind A.M. Best’s ranking.

Comdex: Look for 80% or Higher for Your BEST Annuity Ranking

Comdex is one of the best-ranking scales for insurance providers. The financial rating agency ranks insurance companies with a score from 1 to 100. Each number represents a percentage, and the higher the number, the better the ranking. The Comdex score is one of the best rankings that you can hold accountable for the security of your annuity because it takes all of the available ratings from other financial rating agencies and puts them all together.

Look for a score of 80 or higher. This means that of all of the rankings given to that insurance provider, the average score is higher than 80% of all other insurance companies. Why is the Comdex score the best? The Comdex ranking already includes all of the ratings given to your annuity by other agencies and tallies up their score in order to give you a neat, consensus of all the ratings put together.

Moody’s: The Less Trusted Ranking For Insurance Companies

Moody’s offers grades ranging from Aaa (Superior) to C (Failing). Aaa is given to the most stable financial institutions and indicates security. C is given to companies that are going through financial difficulty. The trouble with using Moody’s as a ranking system for your insurance provider is that it specifically doesn’t concentrate on future reliability. Rather, Moody’s focuses on the past.

Would you really want to only look at your insurance provider based on past creditworthiness? The ability to look into the future based on fiscal trends and economic outlook is important for your interest in annuities because they are typically integrated into your retirement plan, which is in the future.

Standard & Poor’s: The 150 Year Old Insurance Rating Organization

Standard and Poor’s (S&P) is one of the oldest rating agencies. It ranks a company’s creditworthiness by assessing its debt issues, company climate changes, and changes in insurance regulations. The grade given by Standard & Poor’s ranges from “AAA” to “D”. A score of “D” means that the company has defaulted on financial obligations. As the score moves up the ladder towards AAA, the vulnerability of the company decreases.

Standard & Poor’s should not be used by itself when judging which insurance provider deserves your hard earned cash because so many factors can affect an S&P score that doesn’t necessarily have to do with your annuity. For instance, if your insurance provider focuses solely on annuities, the S&P score is going to rank lower because the S&P doesn’t like a narrow business focus.

Which Credit Rating Agency Should I Use For Judging Which Annuity To Buy?

Great question. All four. If you can’t get access to scores from all four, choose Comdex and A.M. Best. These rating agencies focus on the insurance industry, rather than the business sector like the S&P and Moody’s. Therefore, if you can only squeeze two scores out of your financial advisor, choose Comdex and A.M. Best, whose standards reflect an insurance companies ability to pay back long term investments and retirement-focused financial obligations. Remember, your minimum Comdex score should be 80 and your minimum A.M. Best score should be A-.

Understanding Annuities for My Financial Future

Understanding Annuities

There has never been a better time to invest in your financial future. There is a wide variety of strategies to generate income, protect your assets, and secure your retirement income stream. The cost of living is rising and life expectancy is simultaneously increasing for many adults. You may be wondering how to best create an investment strategy in order to not run out of money during retirement.

People want to make the most of their money but without the chance of losing it all.

That’s where annuity products come in.

What Is An Annuity?

An annuity is a contractual financial product sold by insurance companies. Annuities do two things:

To help people limit their risk and give them a better return than a CD,
Or they’re available to help you create a personal pension

Annuities then pay out a stream of payments to the individual at a later point in time.

There are a variety of different annuity products and benefits to each type. As investors seek options to shed risk and guarantee returns, annuities have grown in popularity. With deferred annuities, as well as various subsets, they offer a great balance of protection and reward.

The right annuity products are safe and will help secure your financial future.

How Does An Annuity Help Your Financial Future?

Annuities have changed over the years. While there used to be very limited products to choose from, all that is different now. Annuities can be tied to the performance of stock indexes and offer a wide variety of payout and tax benefits. Most annuities are tied to the S&P 500 but in recent years we have seen a lot of managed volatility indexes used in annuities.

Annuities are recommended as one of the best ways to boost your income when it comes to retirement planning. It is difficult to know how global politics, changing interest rates, real estate transactions and unemployment will affect investment returns. And most of us remember the major impact of the last financial crisis.The financial crisis is estimated to have had a total household wealth impact of over $19 trillion.

With that type of volatility in the market, an annuity is a safer alternative. You can have the benefit of your money growing without the risk of losing any principal. An annuity often guarantees a payout amount that is fixed. This amount can grow based on the performance of the index or stock fund it is tied to. In addition, there are tax benefits that will ease any uncertainty of the total income you can enjoy from your annuity products.

Are There Tax Benefits?

One of the best parts of an annuity is the tax protection it provides. The income payments that you receive can be taxed two ways:

Exclusion Ratio: If you annuitize the contract, you’ll have an exclusion ratio which will tell you how much is the return of principal and how much is interest on your money (the taxable amount). As an example, $1000 payments may have $900 of return of principle and $100 of interest.
LIFO (Last In First Out): Think of pouring rocks in a bucket. The last ones you put in are the first ones to come out. This is the same with an annuity with an income rider. You will pay tax on the income that you’ve earned first and then you will go into return of principle, paying nothing in tax for years until the account goes to zero. Once you get into the insurance companies pockets, it becomes 100% taxable again.

When you do begin to make withdrawals, the income will be taxed. The benefit in terms of retirement planning is that you can sleep better at night knowing that your basic needs will be met with annuity payments.

Annuities & Taxation

There are many different ways annuity payouts are taxed. You will want to understand your personal strategy and match that to the type of annuity you invest in.

For instance, you may want a lump sum or deferred payout. How these monies interact with your other investments and social security income will impact your tax liability down the road.

Like all investment strategies, there are winning ways to leverage annuity products in terms of your individual tax situation. A winning strategy can often include using after-tax dollars to fund your annuity. Understanding your tax and income goals will help you pick the right annuity or annuities for you.

There Are Different Types of Annuities

There are many different types of annuities from which to choose.

The two major types of annuities are deferred and immediate.

Deferred Annuities offer major growth opportunities

The upside to deferred annuities is that they help you set your money aside and let it grow. With a specific timeline when payoffs start your money will be growing as interest accrues.

Immediate Annuities start paying out in no more than 1 year

After you start paying your premium, Immediate Annuities go to work right away at generating payouts. They are often the perfect product for individuals who are close to retirement.

Annuity subsets offer variety

In addition, there are subsets of annuities that include Fixed and Fixed Index Annuities. With fair returns and minimal risk, Fixed Index Annuities are one of the most popular investment products.

There Are Two Distinct Phases of An Annuity

Just as there are different types of annuities, there are also different phases of annuities.

When it comes to building your financial future, you need to know the phase you are in personally, as well as the place your annuity can take you.

There is both the accumulation and the distribution phase in any annuity. Making sure you match your financial plans to the performance and structure of a particular annuity will remove any surprises.

Get The Best For Your Financial Future

Tired of low rates? Thinking it might be time to invest in an annuity?

Tennessee Annuity Rates can help.

We offer simple solutions for your situation.

We know that market risk isn’t for everyone. And we also know that everyone’s financial situation is unique.

We will help you find the best products and services for your unique situation. Don’t wait.

Contact Tennessee Annuity Rates now to receive a free consultation and makes the most of your financial future starting today.

Who Can You Trust With Your Money: FDIC Insured Banks Vs. Annuities

FDIC Vs. Insurance Providers: Are You Protected?

The federal government requires banks to keep 10% of your CD in reserves. 10 cents of every dollar you’ve deposited is in your banks reserves. This goes for money market accounts as well as any money that you put in your bank account. On the other hand, state insurance commissioners regulate annuities. This creates a major difference because insurance companies have to keep 100% of your annuity. That means 1 dollar for every dollar of your investment. According to Forbes, if you wanted to take your annuity out of the insurance company and liquidate that asset, you would walk away with the current value of the annuity plus the current value of future obligations on those contracts.

Breaking It Down: What Is The FDIC Good For?

The FDIC has a coverage limit of up to $250,000 per depositor, per insured bank. If you share an investment account with your spouse, however, you split that $250,000 insurance coverage limit 50/50. FDIC does not insure your money market accounts, CD’s, annuities, stocks, bonds and any other financial instruments.

Lehman Brothers and Bear Stearns closed their doors, causing an earthquake in investor confidence. And there’s no need to go into detail of how many high-end investors had their hopes of an ROI dashed from the Bernie Madoff scandal. Consequently, the Reserve Primary Fund temporarily ensured mutual funds. Your FDIC confidence extends only as far as your dedication to what we’ve always been told, no matter how much it actually protects you. Annuity protection, more often than not, exceeds the insurance limit of the FDIC.

The New Financial Trend That Has Investors Sleeping Easy

The FDIC covers up to $250,000 if banks go belly up. But what about our annuities? State laws govern what happens to your annuities after you insurance fails and goes into liquidation. In Florida, for instance, your annuity is insured up to $300,000 for each contract owner. Annuities are guaranteed in Florida far more than your bank’s FDIC insurance is able to guarantee your CD’s and money market account and other financial instruments. How? If you and your spouse each have a contract, you are both ensured up to $600,000 together, rather than the flat $250,000 insurance that the FDIC extends. With annuities, you can maximize your coverage by investing in an annuity from multiple insurance lenders.

See my blog on how much protection your annuities have state by state in case of litigation, bankruptcy or debt collectors and creditors.

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.

Why Invest in Annuities? Because The Exclusion Ratios Means Tax-Exempt ROI

Why Invest in Annuities?

Exclusion ratios are tax-exempt portions of your annuity return. For example, each annuity payment you receive can be split into two distinct parts. The annuity investment capital is one portion. The other portion is an additional amount that is taxed at the current income rate. This portion is interest that you’ve earned. Consequently, it’s taxed as regular income would be. The capital portion of the return is not taxed. The return on capital, or the additional balance after the principal capital is subtracted, is taxed. This is because it’s considered part of the annuitant’s gross income.

What Is The Exclusion Ratio?

The exclusion ratio is a calculable ratio used to identify the portion payout that is excluded from taxable income. The exclusion ratio is the amount that the annuitant invested into the annuity divided by the return expected from the investment. Apply this exclusion ratio to each annuity payout. Now, identify the percentage of each return that is tax-free. Do not consider it part of gross income.

For example, say that an annuitant invests $158,000 into an annuity. The potential income stream based on life expectancy could be $264,000. The exclusion ratio would be $158,000 / $264,000, or 60%. The tax-exempt portion of a $1,250 per month payment would then be $750. The remaining $500 balance would be taxable as additional gross income.

Take the below as a more realistic representation of the exclusion ratio:

**This is strictly hypothetical. Any illustration you get from an advisor will show exact numbers.

What Is The Benefit of The Exclusion Ratio For The Annuitant?

You don’t need to add the tax-exempt return to your W2 or tax return during tax season. It’s completely exempt from gross income taxation.

Annuities calculate the payout based on the life expectancy of the annuitant. Consequently, requirements do apply for these types of investments. Use IRS tables to determine the total expected value. Different tax exempt rules apply to those annuitants who have retirement plans under the IRS public school employment laws which may allow the annuitant to have a greater amount of tax exemptions from an annuity.

Pros and Cons of Annuities

What are the Pros and Cons of Annuities?

It may send your mind into an infinite loop to imagine using money to buy money products, but that’s just how the financial world works. And Americans did just that! In just the third quarter of 2016, USA investors analyzed the pros and cons of annuities and spent $51.3 billion on them.

Sound like a lot? Maybe not. Turns out that we bought $58.5 billion in annuities in the same quarter of 2015, which represents a 12.3 percent decline in one year.

What’s going on here? Have the tides turned or are more investments clogging the market and our wallets? Read on for a major return on investment.

Pros and Cons of Annuities 101

Mastering annuities can take an entire semester or more in a hard-core economics school, but we’ll try to break it down for you.

Annuities are retirement-focused investments that pay you money.
You can pay a lump sum (one-time) for the annuity or schedule payments, depending on the annuity and your Advisor.
Excellent option for tax-deferred retirement income
No annual contribution limit
Not all annuities are the same. They include:
- Fixed (Guaranteed income no matter what happens to the market or the insurance company, but these annuities do not adjust with interest or the cost of living)
- Indexed (Flexible, but also returns a guaranteed minimum)
- Variable (Totally dependent on how the funds you select to do in the market, this is your riskiest option)

Pro: Fee-Free Fix!

If the idea of paying fees for an annuity just doesn’t add up, an indexed or fixed annuity may be an ideal match for your investment portfolio. You can buy these types of annuities from an insurance company and will not be assessed an administrative fee on top of what you put into the fund unless you add a rider or a link to the rider.

Buyer beware! These types of annuities don’t have administrative fees, but that doesn’t always stop less than respectable agents from trying to tack them on.

And you probably know we can’t get something for nothing.

As you enjoy the benefit of the no-fee annuity, keep in mind that you will (more than likely) experience fees if you withdraw from that annuity before the agreed-upon period ends. When you do need to make withdrawals, you may face surrender charges.

Financial companies have to make their money somewhere. But if you purchase this type of investment, choose one that has a term you can be happy with long-term and you’ll be feeling free.

Con: Early Demise Can Bring Surprise

And we aren’t talking about to the decedent.

When you purchase an investment, you’re looking into that crystal ball of the future for a long, long way off.

Unfortunately, life tends to get in the way of our plans.

Let’s say Person A purchases a 10-year annuity at age 55, expecting the annuity to come due at age 65. Person A then passes away at age 57, 8 years before the annuity date.

As the University of Wyoming explains, if the annuity holder dies “early,” the annuity could lose value as it passes on to the next property holder (the designated recipient from – in this case – Person A’s will).

Of course, it’s good to plan for the future and no one knows what the future will hold, so not purchasing annuities out of fear can really hold you back.

Pro: Income Stream, Flood, or Trickle

For many, annuities are a choice because of their income-providing potential.

You may be thinking, if I have the money, why am I going to give it to an Advisor who will then slowly trickle it back to me?

It almost makes this consideration of pros and cons of annuities more like no and cons!

But let’s take a step back.

Yes, you’re handing over a (sometimes large) lump sum of money.

But these “immediate annuities” really do provide you that stream of income because you get back guaranteed payout for as long as you live. Whether that amount surpasses your lump sum or not, you continue to receive the payments.

Whether you’re about to be swimming in a small creek or a huge basin of water-slash-income for the rest of your life depends on how you set things up with your Advisor.

Con: You Need Money to Make Money

Unlike stocks which you can literally purchase for a couple of bucks a share or bonds with just a small out of pocket cost, annuities don’t come cheap.

Some annuity advisors suggest you start with a minimum of $10,000 to $25,000 investment. Remember, when considering the pros and cons of annuities, you need to keep in mind that the annuity is supposed to be an income stream for life. That $20 for the hot stock on the market won’t get you very far in annuity land.

Also, the more money you can invest in an annuity, the better rates you can get. It may not seem fair that those who have the money to assure themselves a better income stream later in life may not need it.

But that’s how the annuity world works and once you understand it, you can play it to your benefit.

Ask your Advisor if he or she offers flexible premium annuities. Not all of them do, but you may be able to enter into this type of annuity with a minimum purchase of just $100, which definitely does seem more “flexible” than $10,000.

Cash In on Your Experiences Here

Still feeling like less than a hundred bucks at all the pros and cons of annuities?

Don’t worry. Help is available.

Free help. With no administrative fees or early withdrawal penalties!

Click here to sign up for a free consultation and annuity review. (Guess you CAN get something for nothing!)

By the way, be sure to ask your prospective agents about their experiences and length of time in the business. We don’t want to scare you, but if your Advisor goes out of business, you may lose your annuity investment, too.

This depends on the investment and other legalese, but it’s all the more reason to be informed, to make good choices, and to not get ripped off.

We’d love to hear from you, too, about your annuity experiences. Have you ever had to make an early withdrawal? Did your annuity consultant assist you?

Please share in the comments below and let’s help each other start saving!