In a 2013 survey, 38% of “transition boomers” (ages 55 to 65) reported that they don’t “have a clue” about annuities. Yet almost nine out of 10 expressed a desire for the kind of guaranteed income offered by some annuity products.(1)
If annuities seem like a foreign language, you may want to start with this simple definition: An annuity is a contract with an insurance company that offers a future income stream in return for one or more premium payments. Of course, any annuity guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company. Are you familiar with what Annuities can do for you? Here are some of the basic options available.
Fixed, Now or Later
A fixed annuity offers a set rate of return during the life of the contract, which may be the owner’s lifetime, the lifetimes of two people, or a specific number of years. Payments from an immediate annuity begin right away (or within one year) and continue for the duration of the contract at a specified rate. Payments from a deferred annuity start at some point in the future at a rate that reflects the value of any tax-deferred growth during the accumulation period. Assuming the same principal investment and contract duration, a deferred fixed annuity could potentially provide a larger future income stream than an immediate annuity.
Variable Growth Potential
A variable annuity offers the potential for growth because a portion of the premiums is invested among a variety of investment “subaccounts.” The annuity’s future value and income stream are largely determined by the performance of the selected subaccounts. To help protect against market risk, you may be able to purchase guarantees for an additional cost, such as a guarantee of minimum fixed income payments or a guarantee to withdraw a specific amount over a lifetime, regardless of account value.
Generally, annuities are purchased with after-tax funds, in which case only withdrawn earnings are taxable as ordinary income. Early withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty. Most annuities have surrender charges that are assessed if the contract owner sells or withdraws money during the annuity’s “surrender period.” Withdrawals reduce annuity contract benefits and values.
Annuities typically have contract limitations, fees, and charges, which can include mortality and expense charges, account fees, investment management fees, administrative fees, charges for optional benefits, holding periods, termination provisions, and terms for keeping the policy in force. Annuities are not guaranteed by the FDIC or any other government agency. They are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.
A variable annuity is a long-term investment vehicle designed for retirement purposes. The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered or annuitized.
Contact Frank for more information or assistance in seeing what might work for you.
Variable annuities are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1) LifeHealthPro.com, April 12, 2013
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2014 Emerald Connect, LLC.