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.

Understanding Different Annuities

Receiving A Paycheck For The Rest Of Your Life Sounds Great, Right? This isn’t a dream. It’s actually possible thanks to annuities.

Annuities are a form of life insurance. You pay a sum of money (called a single premium annuity, not to be confused with a SPIA). This can be either all at once or over a period of time (flexible premium annuity). In return, your money does not go down (only if you buy from one of our advisors), it only goes up (depending on the crediting option you choose). Also if you buy an income rider (you will pay a fee, should only be about 1%) you receive regular disbursements of that money until you’re no longer living.

A staggering 84% of Americans believe that this is a beneficial concept, yet only 14% have actually purchased an annuity themselves.

A primary reason for the hesitation: A lack of knowledge around annuity options and uncertainty around purchase procedures.

It’s important to understand that not all annuities are created equal before you sign on the dotted line.

Interested in learning more? Let’s dig in!

The Big Two: Deferred Annuities Versus Immediate Annuities

Our discussion on the different types of annuity must begin with the two major categories: deferred and immediate.

Deferred Annuities

Put simply, deferred annuities are those that you don’t receive until a set time in the future. Essentially, you pay your premiums in full, then wait. Some you can add money to called a flexible premium. I like the flexible premium annuities because they allow you to make additional deposits and all of the money matures at the same time. Again this is only available when you buy through our network of advisors. We have removed 90% of the annuities on the market and only allow the top 6-8 insurance carriers to be sold. That said other insurance people or advisors will sell you anything just to make a commission, we make sure you don’t get screwed.

The obvious advantage to this type of annuity? The longer your money sits, the more it grows. In addition, the investment remains tax-free until you’re ready to pull it out, at which time it’s taxed at the ordinary income rate. Again any return you made in the annuity comes out first and you pay tax on that.

Are Deferred Annuities Beneficial?

This type of annuity is also beneficial in the sense that it works with almost every pocketbook and timeline. Got a large sum of money you’re ready to invest? Great, you can put it all on the table and pay your premium immediately, again up to $1,000,000 (and we do a few per month that are above this number). Rather wait and pay your premium off over time in regular intervals, flexible premiums? That works too. Most annuities start at $10,000 or $25,000.

Yet, while time is on your side in that regard, it might be against it in another. The main drawback to this type of annuity is that you have to wait to access it.

If you make withdrawals before you reach retirement age, you’ll not only pay the income tax on your earnings. You will also be subject to some pretty hefty early withdrawal penalties and surrender charges, some of which could be as high as 20% of your investment when you buy outside of our network. REMEMBER do NOT allow anyone to sell you an annuity that has a surrender charge that is over 9% MAX MAX 10% and the term should not exceed 9 years. Most should be 6-7-8 years.

Immediate Annuities

The other type of annuity is an immediate one.

Contrary to deferred annuities, which have an accumulation period during which you must wait to receive your earnings, immediate annuities start paying out no more than one year after you’ve paid your premium.

While most people choose to invest in deferred annuities when they’re fairly far from retirement age, those closer to that magic number might want to invest in immediate annuities.

This way, they’ll be a shorter window of time between when they make their payment and when they begin receiving their money.

Another advantage to these types of annuity is that they can provide a useful tax break. Here’s the breakdown:

The payments you receive on an immediate annuity are divided into interest and principal.

While the interest is taxed as ordinary income, the principal on these types of annuity remains tax-free, because it is essentially a return on your initial investment. This is known as the exclusion ratio.

Yet, one of the main drawbacks to an immediate annuity? It expires when you do, so the window of time to access it might be narrow depending on when you choose to invest.

Annuity Sub-Sets

Once you’ve decided whether you want to invest in a deferred or immediate annuity, there’s one more step to take. Now you must decide if you want to invest in a Fixed (Traditional), Fixed Indexed (FIA) or Variable Deferred Annuity.

Fixed (Traditional): This type of annuity is essentially a savings account offered by your insurance agency. The agency will use its in-house portfolio to determine the rate at which your money will build interest during the accumulation period. Lock in your interest rate in order to guarantee yourself that rate. That’s the good news. Most fixed products are 3 years to 7 years. The sweet spot as of this post is 5 years.

That same lock-tight security applies to your payments on these types of annuity. The amount you receive is then set. It will not change over the course of your lifetime.

This type of annuity is one of the safest and is advisable for the more risk-averse population, generally those 60 and older.

Fixed Indexed (FIA)

While Fixed Traditional deferred annuities lock you in a certain interest rate, the interest provided under FIA (index annuity) annuities is based on how the stock market performs.

Consequently, your interest rate is determined not by an internal portfolio, but by the performance of an external index. One example is the S&P 500.

While the credited interest is subject to these external conditions, it may fluctuate during the accumulation period, but it will never fall below zero.

Variable

Interest rates are subject to market volatility. A company’s rate lock does not offer security. They could even go way below zero. It is like owning mutual funds. When the market drops 20% your variable annuity will fall even more then 20%.

Such conditions can be risky. Your insurance company will set a minimum payment amount at the onset to ensure that no matter how the market dips and surges, you’ll have a guaranteed payout at the end.

PLEASE REMEMBER the FEES on this type of annuity are 3-5% and have market risk. Most of our clients do not buy this unless they are in their 30’s max 40’s and have 20 years before they retire.

Making the Move: The Right Types of Annuity For You

Not sure if an annuity is right for you? Or maybe you’re sure you want to invest, but you don’t know where to start or who to talk to?

That’s why we’re here. We make it easy to pick the investment plan that best fits your budget, goals, and future dreams.

Learn more about the services we provide, browse our blog for relevant topics, or leave a comment below and let’s start saving!

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