Whether you are trying to maximize the tax deferred growth of your money without market risk or guarantee a future income stream that you will not outlive, or both, there is a solution which will best fit your individual goals and objectives.
We specialize in both fixed annuities and equity indexed annuities to meet the needs for our clients. There is not “one perfect product” to meet everyone’s needs and the industry that offers new products and carriers on an ongoing basis is constantly evolving. We stay current on the best carriers and products so that we can best match the growing needs of our clients to the best products available.
What Are Annuities?
An annuity describes a contract offered by an insurance company that allows you to accumulate funds for retirement on a tax-deferred basis. Upon retirement, there are a number of options to receive income from an annuity that can be guaranteed by the insurer to last as long as you live.
How Do Annuities Work?
An annuity is an investment vehicle primarily for accumulating retirement savings or creating a retirement income. During the accumulation phase, you pay premiums to the insurer and earn interest on a tax deferred basis.
During the second phase, called the Payout phase, the company pays income to you, or to anyone else you choose. Unlike many other retirement savings instruments, you will typically have flexibility in how you receive your funds. For instance, you can choose to receive a certain monthly payment that will last until the money runs out, or choose a certain period of time that you want to receive you money like a 10-year payout, 20-year payout, or even a lifetime payout of income.
How Do Annuities Best Serve Investors?
The two primary reasons to invest in an annuity are:
- Saving money tax-deferred for a long-range goal (like retirement)
- Receiving an income stream for a certain period of time.
There are other strategic estate planning situations where annuities may be warranted as well. However, these will be dependent on your specific financial situation.
What Are Some Types of Annuities?
While annuities might seem complex at first, they become easier to understand by breaking them into the following components:
- How money is paid into the annuity contract
- How money is withdrawn
- How the funds are invested
There are two broad classes of annuities: “Deferred” annuities and “Immediate” annuities. Each class has numerous sub-classes.
A deferred annuity is most appropriate for people who want to:
- Save for future retirement
- Not touch the principal and interest until age 59½ or older
- Find an investment that will earn tax-deferred interest for many years
With a deferred annuity you pay a premium to the insurance company which issues a contract promising to pay interest made on the premium while deferring the income and the taxes until you actually withdraw the money or begin receiving an income.
There are three major types of deferred annuities:
- Fixed Deferred annuities
- Equity-Indexed annuities
- Variable Annuities
Fixed Deferred Annuity
A fixed deferred annuity pays a guaranteed “fixed” interest rate (based on the current market rates of interest) where the earnings compound and grow tax-deferred. Fixed annuities offer safety of your principal from typical day-to-day market fluctuations in the stock, bond or other investment markets.
Equity Indexed Annuity
An equity-indexed annuity differs from a fixed deferred annuity in that the rate of return on your investment is based upon the better of either a) the growth of a named stock market index, such as the Dow Jones Industrial Average, S&P 500 index, bond market index or b) a minimum guaranteed interest rate.
Many equity-indexed annuities offer you an interest crediting method that is tied to the index gains. Still, this type of annuity does allow for potentially higher returns than a typical fixed annuity, since you can participate in a rising stock market or index, yet be protected on the downside by the minimum guaranteed rate of return.
An Immediate Annuity is most appropriate for those who want to receive an immediate and predictable payout. The immediate annuity allows you to deposit a lump sum and begin receiving regular payments normally within one year after the deposit. It is usually funded with a single premium, and purchased by retirees with funds they have accumulated for retirement.
However, with the new Guaranteed Lifetime income riders that come free or can be added for a fee to most deferred annuities today, using a deferred annuity and simply turning on the income rider may be a better choice. The income rider may produce a higher monthly income and offer some flexibility and control which the immediate annuity cannot.
Retirement Income Considerations
You will have several options when it comes to deciding how you want to receive your annuity income. Here are a few things to consider before making your decision:
Your Age and Health:
Life expectancy continues to increase. The average person, living a healthy lifestyle, may expect to live longer. Studies show that there is a 48% chance that one member of a couple age 65 today will live to be age 95. It is conceivable that you could spend as many years in retirement as you did working towards retirement.
Sources of Retirement Income:
In the past, defined plans such as Social Security and an employer-sponsored plan were the major sources of retirement income. Today, these plans provide a smaller portion of retirement income requiring you to provide a larger portion of your retirement income.
Inflation, regardless of rate, will erode the value of your savings and reduce your spending power. By taking this factor into consideration, it is important that you plan your retirement carefully. You need to review all sources of income so that you can determine whether you will have sufficient income for your entire retirement.
What is the best annuity?
This question is best answered with other questions. What is the purpose of the annuity? What would you like the annuity to accomplish for you? Many companies and annuity marketing organizations will tell you how great their annuity products are and how strong their features and benefits are. The issue is not the product and how well thought out it may be, but how the annuity makes sense for your specific situation.
As an example, if you are in need of safe secure regular income, the benefits of tax deferral would have no bearing.
There is a simple rule you can follow: an annuity can be a great product but only if it makes sense to you and your personal situation. It is important that you collect the facts and match your needs against the benefits available.
Considerations should include topics such as risk tolerance, income needs, long term care needs, guaranteed interest rates, payout options, inheritance, fees (if any) and other contractual features.
The answer to “Which annuity is best?” is “It all depends on what the use of the annuity is and what you want it to accomplish.”
Tips for selecting the best annuity for you:
• Compare the features and rates of different annuity plans
• Review the annuity provider for service history
• Understand what the guaranteed interest rate is
• Find out if the annuity contract contain surrender penalties and if so how long are they along with any fees forgiven in the event of death
• Ask if there are any fees or expenses
• Inquire about options for accessing your funds
• Think if the beneficiary will receive the full value of the annuity
• Explore with options for income are offered in the contract
In conclusion, always take your time and ensure the annuity matches up to your expected use.
Equity Indexed Annuities
One of the key issues facing every investor is to find the right balance between risk and reward. Playing it safe means getting minimal returns back, with some pre-specified interest. Going for high profit means a higher risk factor which will be something that you will need to learn to live with. Faced with these opposing current, the insurance industry has come up an innovative solution in the form of equity indexed annuities(EIA), which give an investor the best of both worlds – a percentage share in profits, if any, from investments in the stock market, coupled with the security of a guaranteed minimal amount.
The returns from these annuities are based on the increase in the stock or index, such as the S&P 500. If stocks go up, you get a share of the profit. If the stocks fall, you won’t lose any money, since your contract assures you minimal returns of principal amount plus pre specified interest. In effect, you have a chance of making a profit, but you are not liable to bear any losses. So who does and how can someone offer you stock market profits without putting your investment at risk?
The insurance company that issues the annuity takes a percentage of the profits from the increase in stocks. The percentage of profits allocated to you will vary by company, amount of investment and the type of contract. The risk of investments being wiped out at the stock market is taken entirely by the company. Therefore, you are paying a part of your stock market profits in return for the company assuming all the risk.
The specific terms of the EIA, and how and when interest is credited to your account will vary depending on the issuing company. For example, the interest could be credited annually based on the increase in the value of your account, or the contract may specify that the interest is calculated only at the end of the term of the EIA, which could extend to years. The amount of profit you can make from a rise in the linked stock index also changes depending on the type of EIA and the issuing company. The insurance company can set an upper limit on potential gains by allocating a percentage share of index performance, growth caps or they can implement margins.
It is to be noted that the possible benefits from an EIA may vary depending on the terms of your contract, market fluctuations, and withdrawal date. As with any investment, default risks apply and consultation with a trusted financial professional is advised.
Annuity benefits from an Investment perspective
While annuities and the net returns they generate are based on a series of factors which vary depending on the issuing company and your choice of annuity, they do offer huge flexibility in terms of transferring part of the funds or the entire annuity itself. Due to the highly profitable nature of annuity products, insurance companies offer a variety of incentives and bonuses to get investors to transfer. This generally helps to offset the early surrender charges applicable when you remove yourself from an annuity investment.
Ultimately, the most important benefits from an annuity are safety, tax deferral and guaranteed payments. No other investment vehicle will continue making payments without management or risk, even if you live well past retirement age. Either your existing capital gets depleted, or you have to continue managing, with some risk, an investment portfolio. With an annuity, the accumulation and distribution phases of investment are merged together and what you get is an investment vehicle which offers substantial and continued returns with relatively low or no risks in the long term.
It is to be noted that there are various kinds of annuities, and numerous insurance companies which offer annuity products with varying rates of return, different administrative and annual charges, and differing corporate policies, annuity surrenders and transfers. Each annuity and each company has its own set of advantages and features. The choice of annuity and company most suitable for you, along with the benefits that best apply to your specific situation, should be decided by a competent financial advisor.