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Annuities are contracts offered by insurance companies, that offer different guarantees and features that can not be found in other types of saving and investment options. When used correctly, annuities can offer all or some of the following benefits: There are all different types of annuities available to people and it is important to know the differences when making a decision on whether or not to purchase an annuity. An annuity is typically either set up as an immediate or a deferred annuity. The main differences are: Immediate annuity- The person puts in a lump-sum of money and in return, the annuity provides income either for a certain length of time or can be used to provide an income stream guaranteed to last for as long as the annuitant is alive. This type of annuity is very effective when used for income planning. It is often very important for a person to know how much income he or she will have on a consistent basis, and an immediate annuity can provide a guaranteed, predictable amount. Deferred annuity- Like a savings plan or investment, the annuity is left to grow, usually tax-deferred, until a later time. At the end of the contract period, the person can take all or part of his money out, or can turn the annuity into an income stream, similar to an immediate annuity.
Within the categories of immediate and deferred annuities, the types of annuities can be broken down even further, based on the way gains and losses are credited to the account. The types of deferred annuities are: Variable annuity*- With a variable annuity, you choose between different investment sub-accounts. The options for sub-accounts will vary based on the company, but usually contain stock and bond fund options, or fixed account options. Your account value can go up and down based on the performance of the sub-accounts, however, your principal is guaranteed in the form of a death benefit. This means that no matter how much money your account has lost, when the annuitant passes away, the beneficiary will get at least the original deposit back. It is important to realize that if you try to withdrawal your money from the annuity, you will usually only get the account value minus any surrender charges. Again, the principal is usually only guaranteed at death, and any withdrawals prior to death are based on the sub-accounts values. To give the principal guarantee death benefit, the insurance company charges annual mortality fees. This is on top of the fees charged for the managing of your sub-accounts. We have seen total fees as high as 5% per year, so be careful if you choose to go with a variable annuity. These fees are usually charged even if your account lost money for the year. Fixed Annuities- There are three main types of fixed annuities. The first two are the ones that most people think of when they hear fixed annuities, a multi-year guaranteed annuity and a traditional annuity. With a multi-year guarantee annuity, you know in advance what your annuity will earn during the term. For example, you might find a 5-year fixed annuity paying 5% per year. You know that you are getting 5% per year for 5 years. It could also be that that you find one that gives you a higher rate in the first year or two, and then a guaranteed rate locked in after that. The other type of fixed annuities that most people know about, is the type where you get an interest rate that adjusts with the economy and interest rates in general. The annuities usually have the nice feature of having a minimum guaranteed rate. For example, if interest rates are in the 3% range and the annuity has a minimum guaranteed rate of 4%, then you are guaranteed to still receive the 4%. Index Annuity- An index annuity is the third type of fixed annuity. Your earnings are linked to particular index and how much you earn in your annuity depends on how the index does. Usually the options that your account are linked to include the S&P 500, Dow Jones Industrial Average, or NASDAQ, but many have more options. The beauty of an index annuity is that when the market goes down, you cannot lose money. Unlike most variable annuities, you do not have to pass away in order to be guaranteed your original principal. In return for this protection, you give up a part of the gain in the years that the market goes up. In a year that the market goes down, you are not charged any fees. Also, these annuities usually have a minimum guarantee over the life of the contract (usually between 1 and 3% per year). For example, if you kept a 5 year annuity with a 2% minimum guarantee for the 5 year term, and you did not get a 2% per year rate of return, then the annuity company will credit you the amount necessary to give you that 2% minimum. It is because of these minimum guarantees and the fact that you can't lose money that these annuities are categorized as fixed annuities. These types of annuities work real well for people who want to do better than the returns they can get in the fixed market, but can not afford to take on any risk.
Be aware that you can lose principal in most fixed/index annuities if you withdrawal your money before your term is up, so these programs are not good for people who are going to need full access to their money. We have access to over 100 different annuity programs so we can find the one that best fits your needs. We will ask a lot of questions in order to find the annuity or annuities that will help you meet your financial goals. Give us a call at 1-888-527-0872 if you would like to see how a fixed or indexed annuity can help you. |
