What is an Annuity?… Is it right for you?
The market is going up and that is great! But what are you doing differently from 2002 and 2008 with your money? An annuity guarantees an income and may be the right choice for a portion of your portfolio. Ask me if this makes sense for you.
An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid.
So what does this mean?
Annuities typically are a contract between you and the insurance company, offer tax-deferred growth of earnings, may include a death benefit, have a term, offer a specified minimum interest rate. Because the insurance companies are making long term investments to guarantee your annuity, there are penalties for early with-drawls. Some companies offer a 10% with-drawl each year without penalty.
Annuities can be used with qualified accounts (401k, IRA, ROTH, SEP) or come from non-qualified accounts (cash, CD, Money Market, stocks, bonds).
Annuities generally fall into 3 categories-fixed, indexed, and variable.
Fixed Annuities are similar to a CD. An insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing.
Example: You give the insurance company $100,000 for five years and they agree they will pay 3% interest during that time. At the end of the five years, you take your original premium and earnings out of the account without penalty.
Example: This could also be termed period certain meaning that the insurance company will make periodic payments for a specified period of time to you or your beneficiary.
Example: There is also a fixed annuity with a term of life. You give the insurance company your premium and they agree to pay you a specified amount for life. When you pass on, the payments stop. This could be a month later or 50 years later. The amount of periodic payment is usually the highest for a life annuity because the remainder of your premium goes to the insurance company-not your beneficiary. This is the same as a pension.
Fixed annuities generally have no fee to the agent.
Fixed Index Annuities give you the chance of earning a greater return than a fixed annuity based on the performance of an index such as the S&P 500. Indexed annuities also have a guaranteed minimum contact value regardless of the index performance. Although your growth comes from looking at the market index, your gains are locked in annually and you cannot go backwards. Income riders can be attached which guarantee an income for life once you have turned on the income. The income paid to you is subtracted from the annuity while it is growing. The beauty of this annuity is that our income is guaranteed for life even if you run out of money. If you pass on with money left in your account, it is passed on to your heirs. Companies do give a bonus for starting the annuity up to 10%. Hybrid annuities even offer doubling your income if you can’t do 2 of the 6 activities of daily living as long as you have money in your account.
Fixed Index Annuities generally have no fee to the agent.
Variable Annuities give you the option of investing your premium in the market-typically mutual funds. However, you can lose money based on how your investments perform and just as your rate of return varies, your income will as well. Variable annuities may offer a guaranteed minimum rate of return.
Variable Annuities have fees to your adviser up to 4%.