Annuities

Who can benefit from annuities?

Conservative investors, current CD and annuity owners, retirement savers, and investors desiring potentially higher returns with principal and interest rate guarantees will benefit greatly. Future recipients of pensions, 401ks, 403bs, and those about to roll over their IRAs can also be included in those favoring or benefiting from the use of annuities. Annuities could also be ideal for retirees who want the ability to access their savings by taking penalty-free, 10% annual withdrawals, or by taking monthly income. The unpredictability of the stock market leads many investors to the safety of fixed and fixed-indexed annuities.

Many retirees are fearful of losing money in the stock market. With fixed and fixed-indexed annuities, as long as the consumer remains in the annuity contract for the agreed period of time, (3, 5, 7, 10 years etc...), like a CD, they will never lose another dime of their savings, regardless of the volatility in the stock market. With tax-deferred fixed and fixed-indexed annuities, there are no costs and no fees. Consider that some annuities may offer an upfront premium bonus for transferring savings into fixed and fixed-indexed annuities. The premium bonus can help offset previous market losses. 

What is a Tax-Deferred Annuity?
A tax-deferred annuity is a contract between you and an insurance company for a guaranteed interest-bearing policy with guaranteed income options. The insurance company credits interest, and you don't pay taxes on the earnings until you make a withdrawal or begin receiving an annuity income. Your annuity contract earns a competitive return that is very safe.

"Tax-deferred" means postponing your taxes on interest earnings until withdrawal at a future point in time. In the meantime, you are able to earn interest on your initial principal deposit, you earn interest on your interest, and you earn interest on the money you may otherwise have paid in taxes. You can accumulate more money over a shorter period of time, which will provide you with more savings, or a greater income.

An annuity has a rate guarantee which is contractually part of every fixed annuity. Consumers have choices when it comes to the length of guarantee: CD or Multi-Year rate Guarantee Annuities, and Partial-Rate Guarantee Annuities.   

Savings Advantages
Many people today are choosing tax-deferred annuities as the foundation of their overall financial plan. Why? The traditional savings dollar may be taxed every year in products such as CDs or mutual funds. By postponing that tax with a tax-deferred annuity, your money compounds faster because you can earn interest on dollars that likely would have otherwise been paid to the IRS. Later, if you decide to take a monthly income, your taxes may be less because they will be spread out over a period of years. Similar to CDs, annuities have a penalty for early surrender. The slide above illustrates the reason people say, "It's not what you earn but what you keep".

Annuities have Surrender Charges

The surrender charge is the penalty you pay to surrender (cancel) or withdraw all or part of your contract during the contract years. Let's talk about a hypothetical annuity contract with a surrender charge starting at 10% of the contract's accumulation value, which decreases by 1.00% on each anniversary. The surrender charge on the last day of contract year 10 will be 1.00%. On the first day of contract year 11 it will decrease to zero.

This chart details the surrender charges during the first 10 contract years for any withdrawals that are subject to a penalty. If you take a full or partial withdrawal that is subject to a penalty during this time, (usually the contract will include a 10% free withdrawal), the insurance company will apply the surrender charge shown to your withdrawal.

How do I avoid surrender charges?
After 10 contract years you will avoid surrender charges, and you can take your full accumulation value as a lump sum. During the surrender charge period, you can also take penalty-free withdrawals (usually the contract will include a 10% free withdrawal) from your contract, and no surrender charges will apply. Regardless of whether a withdrawal is penalty-free or subject to a surrender charge, any time you take a withdrawal from your annuity it may be subject to taxes.

Can I take money out of my annuity without incurring contract penalties?
Yes. There are a variety of ways you can get some of your money out of your annuity without incurring surrender charges to the accumulation value.  These options include: penalty-free partial withdrawals, contract loans, or annuitization. Annuitization is the process of liquidating your annuity over a said period of time, whereby a portion of the monthly, quarterly, or annual payment represents a portion of both principal and interest. You can receive payments over 5, 10, 15, 20 years, or longer. You can also annuitize over your lifetime or combine your life time with that of your spouse. This is extremely popular, and will insure that you or your spouse will never run out of money, as long as either of you live.

A Liquidity Feature offered with many fixed and fixed-indexed annuities is a "Long-Term Care Waiver". Most fixed and fixed-indexed annuities offer a free annual withdrawal of up to 10% of your account value, which is a featured advantage of most annuities. Although the 10% free annual withdrawal provides excellent liquidity, the owner of the annuity contract has the additional ability to remove all of his or her annuity savings without any penalty, when confined to a nursing home for a  stipulated number of consecutive days (customarily or often 90 days), if the annuity contract comes with a "Long-Term Care Waiver". Generally, the contract must be in force for one year before confinement begins.

Many advisors point to annuities for the additional access to savings made available by way of the "Long-Term Care Waiver", offered by many of the annuities found in the marketplace today. Consumers should know that there is no additional charge for this feature. If a consumer is confined to a nursing home or other long-term care facility for at least 90 consecutive days, and the annuity contract comes with a "Long-Term Care Waiver" as described above, the insurance company will waive all early withdrawal charges, even up to a full surrender.

Another Liquidity Feature offered with many fixed and fixed-indexed annuities is a "Terminal Illness Rider". Often,  after the first contract year, if you are diagnosed by a physician as having a terminal illness (prognosis of survival is 12 months or less), you may have the option with the terminal illness rider to withdrawal up to 25% or more of the annuity's account value, without incurring an early withdrawal charge. There is usually no additional charge for this rider,
"Annuities have surrender charges" but surrender charges are actually a good thing for at least three reasons.

1. They allow 100% of a consumer's deposit to go to work earning interest immediately. A product with a front-end sales charge (which fixed, fixed-indexed, and income annuities do not utilize) reduces the amount of the deposit up front to cover the sales commission, and therefore, less money is working for the consumer from day one.
2. They encourage the consumer's money to stay with the company longer, which allows a carrier to invest longer (at higher rates) and provide higher returns.
3. They discourage the consumer from tapping an account early for non-critical needs, so the money is actually there when they need it the most.

Safety
The safety tax-deferred annuities provide a consumer is traditionally cited as the #1 reason consumers place their savings in tax-deferred annuities. Your tax-deferred annuity is safe because qualified legal reserve life insurance companies are required to meet their contractual obligations to you. Tax-deferred annuities protect your principal, your interest, and your ability to make withdrawals when you need income in retirement.

There are independent rating services that examine the financial health of insurance companies such as A.M. Best, Standard and Poor's, and Moody's. Only insurance companies have the financial strength and the cash reserves to offer the guarantees found in an annuity. Mandated reserve requirements mean that when a tax-deferred annuity is purchased, the insurance company, by law, must set aside dollar-for dollar reserves to cover all anticipated payouts.

The investment risk is assumed by the insurance company rather than by the owner. Always remember that tax-deferred annuities guarantee your principal and interest if held till maturity. When you purchase stocks or mutual funds, you, not your stock broker or the firm for whom they work, assume the risk of the stock market. By investing in a tax-deferred annuity, this risk is absorbed by the financial strength and the cash reserve of the insurance company.

What role do fixed annuities and fixed-indexed annuities play in qualified rollovers?

If you are a conservative saver or investor interested in protecting your principal and interest, fixed and fixed-indexed annuities may be appealing to you.

• Indexed Annuities: Where you may be able to increase your earning potential while protecting your principal. Click here to learn more about fixed-indexed annuities
• Fixed Annuities: Where you know your guaranteed returns.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.

Keep your retirement dreams on track, by rolling over one of these::

• 401-(k) (savings programs for employees of a for-profit employer),
• 403-(b) (savings programs for employees of non-profit and educational institutions),
• 457 plans (for employees of local, and state governments)

It is extremely important, as time can be either on your side or against you, to maintain a regular, tax-efficient method of saving or investing for retirement.

Savings vehicles always guarantee your principal and interest if held till maturity. The best vehicles for savings when it comes to the rollover of a 401-k, 403-b, or 457 plans, are CDs, fixed annuities, or fixed-indexed annuities.  These products are designed for savings and for protection of your retirement savings, therefore, any portion of your rollover that you place in a CD or fixed annuity will not be subjected to market losses.

Investment vehicles are market sensitive and, hence, never guarantee principal or interest.  Account values go up and down with the stock market and the economy, because that is how they work. The best vehicles for investing are said to be stocks, mutual funds, and variable annuities (the word "variable" indicates these are market sensitive). These products are designed for potential, but inherent in that potential for gain is also the obvious potential for loss. Any portion of your 401-k, 403-b, or 457 plan that you rollover into an investment such as a mutual fund, must be a portion that you can afford to accept a possible loss in value.

What are the advantages of a rollover into a tax-deferred annuity?
You can avoid the risk associated with:

• The ups and downs of the stock market
• The concentration of savings in employer stock
• The limitations of former employer plans 
• You can maintain the tax-deferred growth you had in your employer sponsored retirement savings program

By rolling your 401K, 403(b), or 457 Plan into a traditional/ rollover IRA and utilizing a tax-deferred annuity, fixed or fixed-indexed annuity, you can guarantee that both your original principal and future growth will be there when you need it at retirement.

What are the advantages of a rollover into a market sensitive investment, such as a mutual fund?

You can avoid the risk associated with:

• The concentration of savings in employer stock
• The limitations of former employer plans 
• You can maintain the tax-deferred growth you had in your employer sponsored retirement savings program

Simply put, you have the potential for greater gains than you would expect to have in a savings product, such as a CD, or a fixed or fixed-indexed annuity. But be mindful, that you also have the potential for greater losses. Therefore, you must determine what portion of your savings you can risk in the stock market, and what portion of your retirement savings you want to protect from market volatility, and market losses.

Can I rollover my 401k while I am still employed?

If you are 60 years of age or older, and still working, you should know that most qualified plans allow "age 591/2 rollovers". If a particular plan does not, they probably allow rollovers at age 65. Also, many 401-k plans allow "in-service rollovers". Click here to learn more. (send to In-Service Rollover section inside Retirement plans.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.