Why Consider Annuities?

Regarding insurance products, Annuities can be a powerful component to aid in retirement planning and income protection.
With many different options to choose from, Annuities provide customized ways to protect earnings and income into retirement.
Finding the most suitable annuity product is very complicated due to the number of options that may be available to you.
Our team works with you to identify the specific annuity that is the best fit based on our review of your current situation and your plan for retirement.
Check out Investor.gov for more information about annuities.

Understanding Fees, Taxes, and how they affect an annuity product.

Annuity products have several fees, and before we review the types of Annuity products, we will review the fees that will affect your policy. 
We are upfront with fees that will affect your policy and unlike most brokers, we will inform you of the estimated commission we may receive.

We prefer that you are sure you understand all charges before you set aside resources that may not be directly accessible for some time.

Some of the fees you will be exposed to include:

• Surrender charges: a fee levied on your contract if you decided to break your policy prior to the expiration of the surrender period.
  The fee is used to cover the costs of keeping the insurance policy on the Insurer’s Books.
  But to be fair it comes down to the cost to sell and market the product. (Some of the cost may be a commission we may earn on the sale.) 
• Mortality and expense risk charge: a fee that compensates the insurer for any losses that it might suffer because of unexpected events.
  That includes the death of the annuitant(You), the expenses, and other income guarantees that might be included with the annuity contract.  
  The charge pays the Insurer for the insurance risk it assumes under the annuity contract.
• Administrative fees: The insurer may charge you for record-keeping and other administrative expenses.
  This may be a flat annual fee or a percentage of your account value.
• Underlying fund expenses: In Variable Annuities in addition to the other fees, you will also pay the fees and expenses for underlying mutual fund investments and sub-accounts. 
• Fees and charges for other features: Additional fees and restrictive covenants may exist to apply typically apply for special features.
  • Guaranteed minimum income benefit.
  • Long-term care insurance coverage or benefits
  • Initial sales loads, fees for transferring part of your account from one investment option to another, and other fees also may apply.
• Penalties: If you choose to withdraw from an annuity before age 59 ½, you will likely have to pay a 10% tax penalty to the Internal Revenue Service.
  This is on top of any taxes you may owe on any income you receive during the withdrawal unless you qualify for one of the exceptions.

For more information on the tax treatment of annuities please read IRS Publication 575.

 

What are Annuities?

You may be shocked to find out that you are already familiar with the concept of an annuity.
If you play the lottery or otherwise have heard of the lottery you know that you can normally get a lump sum or several payments over 30 years.
If you opt not to take the lump sum payment, the payments you will receive will be paid through an annuity.

Annuities are a long-term tax-deferred investment that is issued by an insurance company and purchased through an Insurance Agents and other financial professionals.
When searching for an annuity the claims-paying ability and solvency of the issuing insurance company are as important as the contract benefits.

When you purchase an annuity contract you agree that the insurer provides you with a predetermined income at annuitization in exchange for a premium paid to the insurer.
When you activate (annuitize) the contract you can receive annuity payments for a set period, for your lifetime, or over a combined lifetime (Spouse).
Annuities can play an important role in retirement planning by helping individuals protect against outliving their assets.

The key benefits of Annuities may include:

• Tax Treatment: Tax savings via deferment
• Creditor Protection: Some protection from creditors in certain states
• Investment Options: Potential investment options in variable contracts
• Income: Lifetime Income
• Death Benefit: This generally equals the annuity value at the annuitant’s death.
  Pursuant to the terms of the Annuity contract, if the Annuitant (You) passes away prior to the end of the agreed term or generally while receiving income from the Annuity the annuity payments will end.
  • It is highly important to designate a beneficiary to receive the remaining money in the contract or a guaranteed minimum.
  • If the Annuitant dies after receiving payments (annuity start date), the beneficiary will generally continue receiving those payments in lieu of a lump sum payment or they could receive nothing.

These benefits will come with some unique risks:

• Liquidity Risk: There is however a risk as in purchasing an annuity you may create a liquidity crisis for unforeseen events.
• Surrender Risk: There are surrender penalties that can create a loss of principal if funds are withdrawn early.
• Credit Risk: You are also taking on credit risk that the insurer will remain solvent for the period of the annuity contract. 
• Inflation Risk: Inflation may be higher than the annuity contract’s guaranteed rate, which can erode purchasing power in the future.
• Market Risk: In variable Annuities, sub-accounts exposed to other securities may decrease in value due to market activity. 

For retirement planning purposes it is our opinion that fixed Annuities are the safest type of Annuities when it comes to protecting your principal from market risk.

Types of Annuities

Generally, Annuities products fall into one of two major categories, Deferred Annuities, and Immediate Annuities.
Annuity contracts are customizable and can be both deferred and immediate with the following issuing conditions.

• Fixed Period
  • Fixed Amount:  (Systematic Withdrawal Schedule) You can select the amount of payment you want to receive each month.
  • The payments continue until you stop them, or you run out of money based on the policy accumulation.
  • A fixed-period, or period-certain, annuity ensures payments to you for a specific length of time. For example, payments may last 10, 15, 20 years.
• Life
  • The Insurer makes payments as long as you live. The payments will be based on life expectancy.
  • There is no guarantee you will get the amount to accumulate.
  • If you outlive the expectancy of the contract, you may get more than the accumulated value of the contract.
• Life with Period Certain
  • Gives you an income frame for life like the life option you can also have the option to guarantee the term.
  • This option will ensure that if you pass away before the guarantee period is over, the insurer must pay your estate or your beneficiaries until the guarantee period is over.
• Joint & Survivor Life
  • The Insurer pays you or your survivor for as long as either of you lives.
  • The amount of the regular payments is normally less than the Life Only option.

Annuities are further classified by the underlying investment types, their purpose, the nature of their payout structure, their tax status, and how the premium is paid. 

Deferred Annuities

Variable Annuities

These Annuities allow the annuitant to participate in market investments to potentially enhance growth.
The value of the account will fluctuate based on market factors and underlying investment performance.
These Annuities can involve market risk and could result in principal losses if the value of the underlying investment declines during market panics or crashes.
Variable Annuities may be suitable for those with long time horizons or those who are better able to handle or desire market exposure.
Some Variable Annuities allow you to protect your investment against loss, while still participating in potential market growth for a fee.

Fixed Indexed Annuities

These Annuities allow greater principal protection when compared to Variable Annuities in a down market and provide greater growth opportunities.
Gains can be limited by caps in participation in exchange you may receive an interest crediting floor or minimum interest rate during down markets.
These Annuities are often complex and offer the ability to adjust or make changes to participation annually. 
These Annuities may also have fees that are subtracted from any potential earnings.

Fixed Annuities

These Annuities may offer a guaranteed interest rate without market participation.
These Annuities help those who want a guaranteed interest rate with minimal investment risk.
Fixed Deferred Annuities may be more suitable for individuals who are desire protection instead of growth as an objective.

While they are often compared to savings certificates of deposit (CDs) they do not resemble bank products at all.
Some of the common items to note about fixed deferred Annuities when compared to bank savings products are:

• Annuities are not bank products and as such, they are not FDIC insured nor do they follow standard probate rules.
• A withdrawal from a deferred annuity may be a taxable event and, in some cases, will cost far more than most bank products available to individuals.
• Funds placed in a Deferred Fixed Annuity can create a liquidity event, access to these funds may be heavily restricted when compared to most bank products.
• Earnings and growth in a Deferred Fixed Annuity compound on a tax-deferred basis. (You pay taxes at annuitization, not annually on interest received.)

Immediate Annuities

These Annuities offer guaranteed,⁴ predictable payments for life or a certain period.
This is accomplished by paying a large premium to the insurer in exchange for setting fixed payments over a lifetime or several years with a minimum of 5 years.
You can start receiving income immediately or defer the income for up to 1 year.
These products are straightforward and easier to understand compared to other Annuity types.

If you fund a Single Premium Immediate Annuity (SPIA) with money you have already paid taxes on, you’ll have a partially tax-free income.
Each payment from SPIA contracts within annuitization will consist of a principal and an earnings portion.
You would be taxed as ordinary income on any distribution of earnings.

If you are worried about RMDs,  (Required Minimum Distributions) the IRS maintains some documentation on what you should expect.
The good news is that If you purchase an immediate annuity using funds subject to RMD requirements you may exclude that amount from your RMD calculation subject to the IRS Code.
The law can change every year, and this note may not be the current treatment in the IRS Code. Consult a tax professional.   
Once you choose to annuitize an Immediate Annuity you are unable to withdraw or terminate the contract. (once you begin receiving income.) 

We focus on Fixed and Fixed Indexed Annuity Offerings

If you are fiscally conservative at this point in your life, a fixed annuity may appeal to you.

• Fixed Annuities offer steady, insurer-guaranteed growth.
• Fixed Annuities also offer tax deferral to help your money grow faster and a lifetime income option to keep your retirement secure.

Our clients enjoy the safety of principal protection, steady tax-deferred growth, a guaranteed minimum rate of return (which is set annually), and insurer-guaranteed income options.

In the first year, your annuity will get off to a faster start with an additional interest rate credit where applicable.

When purchasing Annuities, it is not recommended that you utilize funds that will later create a liquidity crisis in your finances.
  

1. Consider your situation and seek additional guidance from a tax advisor. Although Variable Annuities offer tax deferral, if you are considering one to fund a qualified retirement plan or IRA, you should do so for the variable annuity’s features and benefits other than tax deferral. In these cases, tax deferral is not an additional benefit of the variable annuity. References throughout this material to tax advantages, and tax treatment of specific annuity products such as tax deferral and tax-free transfers, are subject to this consideration you must consult a CPA or other tax professional to give you sound advice for your specific financial condition.

2. Some Insurers reserve the right to limit contributions and may choose not to allow further contributions.

3. Subject to the tax treatment of deferred Annuities, contact a tax advisor regarding the current tax treatment for deferred Annuities you may be interested in.

4. . Guarantees apply to certain insurance and annuity products and are subject to product terms, exclusions, and limitations within the insurer contract, and the insurer’s claims-paying ability and financial strength.

5.  Some Deferred Income Annuity contracts are or may become irrevocable upon the activation of income payments, when this occurs, they may no longer have a cash surrender value. Please review policy documents carefully.