An annuity is a contract issued by an insurance company. It is a unique financial product that provides tax deferral of interest and capital gains and the option (if funds are annuitized) of a guaranteed monthly income for life. Although annuities can serve various needs, the primary purpose of an annuity is that of a retirement vehicle for the annuitant, the person who will usually receive the annuity benefits. The annuity is an attractive retirement vehicle because the money accumulating in an annuity, grows on a tax deferred basis. There are two parts to an annuity: the accumulation phase and the distribution phase.
After accumulating money in an annuity it is not mandatory that the annuitant exercise the annuitization option and relinquish control of his or her cash value and enter into the annuity distribution phase, the annuitant can simply cash out of his or her annuity.
In a fixed annuity, the insurance carrier:
A variable annuity has two types of accounts:
An Indexed Annuity has interest rates that are linked to growth in the equity market as measured by an index such as the S&P 500. The FIA owner enjoys the upside potential of equities but is not exposed to downside risk. Subject to fixed minimum guarantees, the value of an FIA can only increase due to market growth ‐ it will never decline due to market movement. There are many variations in product design. No two of the FIAs are exactly alike, and some are very different from each other. However, all the various types fall into three general categories: annual reset, point-to-point, and annual high-water mark with look-back. The following is a simple definition of each. Please call us if you would like to know more.
* Some annuities allow the insurance company to change participation rates, cap rates or spread/asset/margin fees either annual or at the start of the next contract term. If an insurance company subsequently lowers the participation rate or cap rate or increases the fees, this could adversely affect an investor's return. Therefore, a prospective investor must carefully review his or her contract in order to examine these issues.
As part of the distribution phase, the owner has two options, he or she can withdraw money (either in a lump sum or elect a systematic withdrawal plan) or annuitize (purchase an annuity pay out plan).
When the owner annuitizes the funds he or she purchases an annuity pay out plan. In a Fixed and in an Indexed Annuity the owner purchases a monthly income that will be paid to him or her until death. It is a guaranteed income that will not change. In a variable annuity, the owner has an option to do the same or transfer all or part of the contract to one or more of the sub-accounts that are available, and annuitize those funds. The funds that are annuitized in the separate accounts produce an income that will change from month to month based on the performance of the sub-account that the funds are placed in.
Life Only - Periodic monthly payments to an annuitant for the duration of his or her lifetime and then ceases. It is for a lifetime, the annuitant cannot outlive the payments. The payments are determined at the time of purchase and are based on age and sex.
Life with 10 years certain - Payments will be made for at least ten years, regardless if the annuitant lives for the entire ten years. If the annuitant dies during the ten-year period the remainder of the ten-year payments will be made to a beneficiary. If the annuitant lives longer than ten years he or she will continue to receive payments for his or her lifetime. The guaranteed monthly payments will be less than "life only."
Life with 20 years certain - Payments will be made for at least twenty years, regardless if the annuitant lives for the entire twenty years. If the annuitant dies during the twenty-year period the remainder of the twenty-year payments will be made to a beneficiary. If the annuitant lives longer than twenty years he or she will continue to receive payments for his or her lifetime. The guaranteed monthly payments will be less than "life only", and "Life with 10 years certain."
We can help you to determine the type of annuity and the options that best fit you and your future income needs.
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