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.
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.
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)
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.