Annuity Choices and Annuities in Detail – No Bank CDs

Basically, an annuity is a contract between you and an insurance company.  It can be classified by one or several of the following categories:

A fixed or variable underlying investment,
Deferred or immediate pay-out,
Qualified or nonqualified tax status, or
Single or flexible premium payment arrangements.

Features of Annuities

Investment Earnings are Tax Deferred

The capital gains from the investment income of annuities is not taxed until the money is withdrawn, and the withdrawal amounts are more liberal than for 401(k)s and IRAs.  Additionally, there is no limit on how much an individual may contribute to an annuity.

Assets are Protected

Because the assets are legally owned by the insurance company (charity or trust), monies are generally protected from seizure or attachment by creditors.

Options for Investing

Companies that offer annuities will have a variety of investment vehicles such as certificates of deposit, fixed rate options, stocks, bonds or mutual funds.  Some investment options may include floors, that is, a limit to which the investment may decline based on a specific reference point.

No Penalty Transfers

There are no tax consequences when an investor shifts holdings within annuity investments.  This shifting, referred to as rebalancing, is a smart answer to maximizing the return against the risk of your investment.

A Lifetime Income

A lifetime income annuity pays a stream of payments for the investor’s lifetime.  Those payments are based on three factors: the amount the investor contributed, the amount of earnings the investments produced, and the “pool” of aggregate assets from the people who did not live as long as actuarial tables predicted.

Inheritances

Though it is often the case that the insurance company retains all the assets of a group member when the member dies, it is possible for an investor to request to purchase a “guaranteed period.”  This period ensures that should the investor die within the stated guaranteed period, the company will pay one or more designated beneficiaries.  The plus is that annuity inheritances bypass probate and are not affected by a will.

Annuities are useful to help meet retirement goals, diversify investments, protect an individual from outliving assets, and protect assets from creditors.

Remember, there are no limits to the financial contributions you can make to an annuity.  The amount you should invest depends on actual and projected financial needs, long-term financial goals, and current assets and investments.  It is wise to talk through your plans with a professional.

There are basically two general types of annuities.
 
Fixed annuities

In a fixed annuity, the company, charity or trust guarantees a specific amount of principal and minimum rate of interest; that is, your investment will not decline in value.  This commitment holds as long as the insurance company remains financially sound.  In this case, because the annuity retains a specific rate, the amount of the benefit paid is not dependent upon the performance of the portfolio of investments the insurance company, charity or trust uses to support the annuity.  Fixed annuities are regulated by your state insurance department.

There are subcategories of fixed annuities.  An equity-indexed annuity provides a fixed return, but its performance is based on a stock index and associated market fluctuation.  During the accumulation period of the annuity, which is when the account holder makes either a lump sum payment or a series of payments into the annuity account, the insurance company credits the account holder with a return that is based on changes in an equity index, such as the S&P 500 Stock Index. 

The insurance companies may guarantee a minimum rate of return.  Guaranteed minimum return rates vary.  After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum.

A market-value-adjusted annuity allows some flexibility in withdrawal of your monies prior to the end of the period selected.

Variable Annuities

Investments in variable annuities are placed in mutual funds which are closed to investors outside of the annuity’s investing group.  Variable annuities are securities regulated by the SEC.  The return on a variable annuity is based on the performance of the mutual funds within the portfolio, minus the fund expenses.  Variable annuities are structured to provide investors with many funds from which to choose.  These funds are regulated by both your state insurance department and the Securities and Exchange Commission.

Variable annuities are tax-deferred.  That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money.

Variable annuities have a death benefit.  If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount – typically at least the amount of your purchase payments.  Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount.

Variable annuities let you receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate).  This feature offers protection against the possibility that, after you retire, you will outlive your assets.

Other Annuity Features and Investments

Deferred Annuities

These annuities remain in a holding stage for payout upon a later date, during retirement.

Immediate Annuities

An immediate annuity provides a payout at a specified time period, often monthly.  The payment occurs at that interval after the annuity is purchased.

Fixed Period Annuity 

A fixed period annuity provides a payout over specified interval.  This payout depends on the amount that has been contributed to the annuity and the rate of interest provided by the originator.

Lifetime Annuity

As may be expected, this type of annuity provides income for the remainder of the life of the holder of the annuity (the “annuitant”).  An option exists for a two-life annuity so that income continues to be paid to the surviving annuitant until death.

Qualified Annuity
 
This annuity aligns with tax-favored retirement venues such as IRAs or Keoghs and fall under tax provisions applicable to those plans.

Nonqualified Annuity 

Investments purchased under this annuity fall outside of tax-favored retirement venues and are tax deferred until monies are withdrawn.

Single Premium Annuity
 
This annuity is funded by a single contribution, such as a rollover from another fund.

Flexible Premium Annuity
 
These annuities are designed to be deferred as they are funded by a consistent series of payments which are applied toward growth of the annuity principal and investments.

It is difficult to predict or project financial trends, especially concerning your and your family’s future.  A financial planner or your insurance agent can further explain and advise about which kind of annuity best meets your goals.

Tags: annuity, bank CDs, bonds, certificates of depoist, income annuity, investment, Mutual Funds, rate of interest

This entry was posted on Wednesday, August 12th, 2009 at 10:00 pm and is filed under Money Rates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.