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An annuity provides more capabilities than many other types of investments available and can be structured to help with safety, income, tax deferral, and long-term retirement planning.
An annuity provides more capabilities than many other types of investment available. The fixed-rate annuity investment is unmatched by many investment standards because principal, interest rate guarantees, and every dollar invested may be protected according to contract terms.
The annuitant cannot suffer a loss of principal in certain fixed annuity structures, the interest rate may be guaranteed, and interest earned can also be guaranteed. The only time the policy’s value can go down is if there is a withdrawal.
As with any business, insurance companies have independent ratings. For a fixed-rate annuity, many investors prefer an “A” or “A+” rated carrier. Other rating sources include A.M. Best, Standard & Poor’s, and Moody’s.
Both fixed-rate and Fixed Indexed Annuities may provide withdrawal options, although withdrawals may be subject to penalties or surrender charges. Many companies permit withdrawals of up to 10% per year without cost, penalty, or fees.
The fixed-rate annuity investment is unmatched by many investment standards. The annuitant cannot suffer a loss of principal, the interest rate is guaranteed, every dollar invested is guaranteed, there is no investment risk, and interest earned is guaranteed according to contract terms.
The only time that the policy’s value can go down is if there is a withdrawal.
Due to the sheer volume of insurance companies, they collectively own, manage, or control more assets than all of the oil companies in the world combined and more assets than all the banks in the world combined.
It was the insurance companies that came to the rescue of the banking industry during the Great Depression, not the federal government.
By law, insurance companies are required to set aside reserves when a fixed-rate annuity is purchased. These reserves can be used for settling withdrawals and redeeming annuities, but cannot be used to pay unrelated annuity items such as bad debts, overhead, or claims.
Since the insurance company’s annuity portion of business represents their smallest source of revenue, other profit center money is used for this reserve fund.
The investor is protected by a legal reserve pool, which has mandatory membership for insurance companies in most states. The reserve pool’s purpose is to carry out the liabilities and obligations due to the investor, should the primary insurer go out of business.
As with any business, insurance companies have independent ratings. Even though annuities may have a strong record of accomplishment, the insurer’s rating should also be taken into consideration.
For a fixed-rate annuity, many investors prefer an “A” or “A+” rating. For variable annuities, since earnings are not dependent upon the insurer’s solvency, the ratings are not considered in the same way.
A.M. Best, the oldest rating company in the United States, rates companies in much the same manner as our public school system.
Other rating sources you should look at are Standard & Poor’s and Moody’s. In their review of the annuities market, Standard & Poor’s maintains the belief that the life insurance industry, which offers annuity products, remains the strongest in the financial services sector. This view is based upon the fact that the industry as a whole has a solid balance sheet.
Though the interest rate guarantee depends on the annuity, fixed-rate annuities offer a specific and fully guaranteed rate of return for a specified period.
The professional management team plays a vital role in the annuity field. Each member is a specialist in his or her field. These specialists are licensed, regulated by the federal government and state insurance department, highly skilled, and trained to focus on a specific segment of the marketplace.
As with overall ratings, independent sources track the performance of annuities. Specialized publications such as The Wall Street Journal can provide articles on annuities and annuity performance.
Both fixed-rate and Fixed Indexed Annuities provide withdrawal options; however, any withdrawal may be subject to a penalty or surrender charge.
Most insurance companies permit annuity withdrawals of up to ten percent, usually based on the principal, per year without cost, penalty, or fees.
When considering withdrawal options, consider that the restrictions applying to withdrawals will eventually disappear and that there is an estimated 75 percent of all people investing in annuities who never remove any money.
Upon the death of the annuitant, the Fixed Indexed Annuity provides that the beneficiary will receive the greater of the principal plus any ongoing additions or the value of the account on the date of death.
An older person desiring a high-income stream may find the Fixed Indexed Annuity guaranteed death benefit an ideal investment. It is based on the sum of all investments made by the owner or the value on the date of death, whichever is greater.
The guaranteed death benefit will last until either:
The value of an annuity will not be included when the gross estate is valued for probate purposes; therefore, all annuities avoid probate.
What are the risks? The potential for long-term growth in an annuity is exceptional; however, as with any investment, caution and scrutiny should be used. The investment’s potential is dependent upon the market.
Although there are very few disadvantages to investing in annuities, and most of them will never affect the client, there are a few to take note of.
All annuities are subject to the IRS penalty, regardless of annuity type. Withdrawals made before the annuitant attaining age 59½ are subject to a ten percent penalty. Exceptions may apply if the annuitant dies or becomes disabled, or takes a portion of the annuity’s assets paid out as income regularly through annuitization.
Monies accumulated are not tax-free; however, taxes can be deferred and can be indefinitely postponed.
Taxes can be further deferred if:
The tax liability will be the value of the annuity at the time of death minus the amount invested, and then multiplied by the beneficiary’s tax bracket percentage. The contract owner is wise to withdraw money from the annuity when in the lowest tax bracket.
Withdrawn funds of up to ten percent per year, after the first year, are not subject to penalty. The surrender charge applies only when amounts are withdrawn beyond the free withdrawal privilege.
The insurer’s penalty schedule should be investigated before purchasing an annuity, as terms vary.
Surrender charges are not applicable if the annuitant dies or becomes disabled, if withdrawals are limited to those allowed under the free withdrawal privilege, if systematic withdrawals of ten percent per year are made, or if the penalty period has lapsed.
One disadvantage may occur if an investor is locked into a fixed interest rate while the economy is experiencing a period of rising interest rates.
Inflation may be the biggest threat to long-term investments. While a stock market crash may cause temporary losses in stock investments, the market always fluctuates. If stocks are kept long enough, it may be possible not only to regain the loss but also to make an eventual profit.
Therefore, for the long term, the investment must keep pace with inflation.
Deposits to the contract are not subject to a load or front-end fee. However, withdrawals may be subject to a contingent deferred sales charge, also called CDSC, and are assessed on a sliding scale.
Charges are based on either the date of deposit or the date of the contract.
Fees for other options are charges imposed for some additional provisions in the annuity contract, such as stepped-up death benefit, a guaranteed minimum income benefit, or long-term care insurance.
At age 59½, annuitization can be utilized so that portions of the annuity’s assets are paid out as income regularly.
Only a portion of the amount withdrawn is subject to taxation; however, when a lump sum is taken, the entire growth and interest become subject to income taxes.
Please give us a call if you would like help understanding whether annuity investing fits your retirement goals, income needs, and risk comfort level.
Annuities may offer principal protection, tax-deferred growth, resources that can last as long as needed, withdrawal options, and potentially a money-back guarantee depending on the contract.
Fixed annuities are designed to protect principal according to contract terms. The policy value may go down if withdrawals are taken or charges apply.
Ratings can help evaluate the financial strength of the insurer. Since guarantees are backed by the insurance company, many investors review ratings from sources such as A.M. Best, Standard & Poor’s, and Moody’s.
Many annuities allow withdrawals, often up to 10% per year without penalty, but withdrawals beyond the free withdrawal amount may be subject to surrender charges or other fees.
A guaranteed death benefit may provide the beneficiary with the greater of principal plus additions or the account value on the date of death, depending on contract terms.
Withdrawals made before age 59½ may be subject to a 10% IRS penalty, unless an exception applies, such as death, disability, or qualifying annuitized income payments.
Surrender charges are penalties that may apply when withdrawing more than the free withdrawal amount or ending the contract during the surrender period. Terms vary by insurer and contract.
Potential risks or disadvantages can include IRS penalties, surrender charges, inflation, rising interest rates, contract fees, and limitations on liquidity or growth depending on the annuity type.
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