ANNUITIES

What is an Annuity?

An annuity is a financial product offered by insurance companies that provides a series of regular payments in exchange for an initial lump sum or series of contributions. It is commonly used as a tool for retirement planning, helping to ensure a steady income later in life. One of the key benefits of an annuity is that it can provide guaranteed income for a set period or for the rest of your life, helping protect against the risk of outliving your savings. There are several types of annuities, including fixed annuities, which offer predictable payments and a guaranteed interest rate; variable annuities, where payments vary based on the performance of investments; and indexed annuities, which are tied to a market index like the S&P 500 but often include minimum guarantees. Annuities can be further classified as immediate or deferred, depending on when the payments begin. This flexibility makes annuities a valuable option for long-term financial security.

Reasons for Buying Fixed Annuities

Annuities can provide an incredible safety net. Older investors are particularly drawn to annuities as the threat of outliving their money from retirement accounts is a significant risk. Annuities can provide a guaranteed income stream for life, along with guarantee of principal. Think of the annuity as your basement. Laying that foundation will guarantee you have the money to make sure living expenses are met.

In the past, people believed that annuities were for only wealthy individuals or families with a need to either shelter assets or ensure that large amounts of income would be guaranteed. But, alas, insurance companies are successfully marketing annuity products to middle and lower class families who also need to ensure that income continues in retirement. This is especially true as life expectancy for both men and women has increased dramatically of the last 40 years. Annuities are really the only investments that provide options for guaranteed income, a guaranteed return or a guarantee of the Principal.

There are several variations and countless products to choose from, however they all share these common traits.

Tax Deferred Growth: The taxes on the growth of an annuity are deferred. This in essence gives you a better rate of return than some other investment products, because the income that you would have paid in taxes is still working for you.

Principal Guarantees: The safety offered with fixed annuities is perhaps the most important feature to most consumers. As long as you follow the contract rules, and the insurance company remains in good standing, the fund put into an annuity are never at risk.

Fixed, Competitive Interest Rates: Typically speaking, fixed annuities usually offer a higher interest rate than similar products, such as a bank CD or a money market account.

Types of Fixed Annuities

Traditional Fixed Annuities - The traditional fixed annuity is structured very similarly to a bank CD (certificate of deposit). The premium grows at a guaranteed fixed interest rate for a set amount of time. The length of the contract can range anywhere from one year, to as long as 15 years.

Fixed Indexed Annuities - also referred to as Equity Indexed Annuities, provide the same principal guarantees of a traditional fixed annuity, however the rate of return is based on the performance of an index, such as the S&P 500. The insurance company will credit the account with a portion of the indexes upside growth, while offering protection against downturns in the market.

Immediate Annuities - convert a lump sum amount of money into guaranteed income to the annuitant as soon as the annuity is purchased. The annuitant may choose from a lifetime income stream, which provided the income for life, or a set time frame (usually 5, 10 or 20 years).

Common Annuity Terms

Surrender Charge - The surrender charge of an annuity is the penalty or fee applied to the account if it canceled early. The most common structure is a decreasing surrender charge, where each year the surrender charge becomes smaller, until it is gone completely by the end of the contract length.

Premium Bonus - is a term used to describe a feature found on many annuities, in which the insurance company essentially adds 'extra' money to the account during the first year. The bonus can be in the form of a higher first year interest rate, or a partial premium match by the insurance company.