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What Are Annuities?

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 paid. Annuities are most often bought for future retirement income. Only an annuity can pay an income that can be guaranteed to last as long as you live.Your value in an annuity contract is the premiums paid, less any applicable charges, plus interest credited. The insurance company uses the value to calculate the amount of most of the benefits received from an annuity contract.

How Annuities really work.

When an annuity policy is issued the company sets the first year interest rate. This rate is guaranteed for the first policy year and we refer to it as the current rate. The base rate is that interest rate which the company projects it will pay in the second year and thereafter. This base rate is also referred to, as the "renewal rate" is not guaranteed. In fact some companies pay a "renewal rates" which are less than the originally projected base rate.

Note that the difference between the current rate and the base rate is referred to as the bonus rate.

We use the Current Rate (for the first year) and the Base Rate (for each year thereafter) in our formula to calculate the projected "Account Values."

What is a Fixed Annuity?

During the accumulation period of a fixed deferred annuity, your money (less any applicable charges) earns interest at rates set by the insurance company or in a way spelled out in the annuity contract. The company guarantees that it will pay no less than a minimum rate of interest. During the payout period, the amount of each income payment to you is generally set when the payments start and will not change.

Why are Surrender Charges and Withdrawal Charges important to understand?

The surrender charges last for period years and we calculate the projected "Account Value" for the number of years the surrender charges exists. For example; if the surrender charge of the policy lasts seven years, we calculated the projected "Account Value" for only seven year. The reason is the after the surrender charge expires the interest rate is dropped to the contractual guaranteed minimum and the policy values are usually transfer to another annuity. To continue projecting the accumulated value beyond this point is meaningless.

Most annuities allow you to withdrawn interest from your annuity without penalty. Some annuities allow you to withdraw interest with out paying a penalty at the end of the policy year or after 30 days, then as earned.

All most all annuities allow you to withdraw up to 10% of the account value before a surrender charge or withdrawal charge is applied. YOU must know how the Withdrawal or Surrender Charges apply before buying an annuity policy to save yourself unnecessary expenses.

Deferred Annuities

A fixed deferred annuity pays a guaranteed "fixed" interest rate (based on the current market rates of interest) where the earnings compound and grow tax-deferred. Fixed annuities offer safety of your principal from typical day-to-day market fluctuations in the stock, bond or other investment markets. However, since this rate of return is fixed, it is important to consider the impact of inflation on your investment. You will also want to consider the financial strength of the annuity-issuing insurance company, since the return of principal and interest is guaranteed by them. Several independent financial analysis companies such as A.M. Best and Standard & Poor's rate the strength of such insurance companies for you. A deferred annuity is most appropriate for people who want to:

  • Save for future retirement
  • Not touch the principal and interest until age 59½ or older
  • Find an investment that will earn tax-deferred interest for many years
  • Save more than the maximum annual contribution of their IRA or 401(k)

With a deferred annuity you pay a premium to the insurance company which issues a contract promising to pay interest made on the premium while deferring the income and the taxes until you actually withdraw the money or begin receiving an income.

Indexed Annuities

An equity-indexed annuity differs from a fixed deferred annuity in that the rate of return on your investment is based upon the better of either a) the growth of a named stock market index, such as the Dow Jones Industrial Average, or b) a minimum guaranteed interest rate. Many equity-indexed annuities offer you a portion (not a full 100%) of the index gains. Still, this type of annuity does allow for potentially higher returns than a typical fixed annuity, since you can participate in a rising stock market, yet be protected on the downside by the minimum guaranteed rate of return.

Single Premium Immediate Annuities (SPIA)

An Immediate Annuity is most appropriate for people who want to:

  • Retire in the very near future, or are already retired
  • Begin drawing an income from a lump sum of money that they currently have
  • Receive an immediate and predictable payout
  • Receive a steady payout for life (based on life expectancy)

The immediate annuity allows you to deposit a lump sum and begin receiving regular payments normally within one year after the deposit. It is usually funded with a single premium, and purchased by retirees with funds they have accumulated for retirement. These annuities can provide a predictable stream of payments that will continue for the rest of your life, or for a time period you choose.