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On a basic level, annuities are insurance products purchased from an insurance carrier that are designed to help protect your retirement income from risks like market exposure or outliving your money.
Anyone can sell you an annuity; however, it takes a truly qualified and experienced advisor to know how to structure them for income, inflation, growth, return of principal, and tax advantage.
Typically, buying one annuity will not fix all income and retirement needs. It may take a financial plan including an income source, life insurance, emergency funds, possibly an annuity, and other financial tools to build a robust financial portfolio.
Similar to FDIC insurance backing for a bank account, annuity owners are protected by a state guaranty association in the unlikely event the insurance company has financial trouble, subject to the limits of state law.
There is a wide range of annuities with varying options and features. All annuities are divided into two basic types: Fixed or Variable. There is also a hybrid type called a Fixed Indexed Annuity.
Annuities can be structured for immediate income or deferred income. The correct option depends on when you need income to begin and how you want the funds to grow or be distributed.
Similar to a bank account in the United States having FDIC insurance backing, if an individual purchases an annuity, he or she is protected by a state guaranty association in the unlikely event the insurance company has financial trouble.
Guaranty associations are created by state law to assure that the claims of an insolvent insurance company’s policyholders who live in the state will be paid, subject to the limits of the law.
All insurers authorized to write life insurance, health insurance, and annuities in the state are required to be members of the association.
There is a wide range of annuities with varying options and features. All annuities are divided into two basic types: Fixed or Variable. However, there is also a hybrid type called a Fixed Indexed Annuity, which has characteristics of both a fixed and variable annuity.
If a set rate of return is desired, the contract owner may choose a Fixed Annuity. This type of annuity guarantees that the money will accumulate at a minimum specified rate of interest. However, the insurance company may pay a higher rate of interest if its investment experience is better than the minimum guarantee.
This type of annuity is a hybrid called a Fixed Indexed Annuity. It is a tax-deferred long-term savings option that provides principal protection in a down market and opportunity for growth in an up market.
It gives you more growth potential than a fixed annuity along with less risk, but less potential return than a variable annuity. Returns are based on the performance of an underlying index, such as the S&P 500 Composite Stock Price Index.
While the benchmark index does follow the market, your money is never directly exposed to the stock market. Consequently, there is no loss of the gains you have accumulated due to direct market exposure.
If a more conservative to aggressive investment is desired, the contract owner can choose a Variable Annuity. In this way, the owner can decide where the money should be invested.
These annuities also have death benefit provisions, including the attractive element of providing an insurance company guarantee that an annuity holder is entitled to the face amount of the annuity contract, regardless of what happens to the contract’s investments.
Healthcare American does not offer this type of annuity.
The two major applications for the contract owner are the need for income and options for investment. The application required depends on when the need for income occurs.
An immediate annuity can provide income, in some cases, in as little as 31 days after the purchase of the annuity. For example, if the contract calls for monthly installment payments, they will begin one month after the date of purchase.
These annuities are specifically designed for customers who need to receive a specific amount of money each month. These can be used as the sole source of income or as an income supplement.
Payments may be made depending upon the need, on a monthly, quarterly, or annual basis. The amount of the check the client receives will not fluctuate, and the actual dollar amount of the checks is in direct relationship to the total annuity investment.
An important note to remember is that if the insurance company is going to begin paying the annuitant shortly after the purchase of the contract, then the immediate annuity must have been paid by a single payment.
A deferred annuity is used to receive income payments at some further point in the future. It offers growth and flexibility for growth either over a long or short time.
A deferred annuity can be paid for by a single premium, annually, semi-annually, quarterly, or by monthly installments over time. Unlike the immediate annuity, deferred annuity payments begin after a designated period has elapsed from the purchase date.
The contract owner can receive a specific dollar amount of income each year and can direct how the balance is to be reinvested. This deferral process gives the contract owner flexibility for automatic reinvesting, withdrawal of a portion of principal, or termination of the investment.
Both fixed-rate and variable annuities have an accumulation period, effective the moment investments are selected, and a payout period.
A Fixed Indexed Annuity offers a wide range of investment options. The value of the investment varies by the value of the total investment performance.
If fixed annuities guarantee fixed monthly amounts, monthly annuity payments may vary and will depend on the performance of the investment options an annuity holder chooses. The fluctuation of the cash value is the main difference between Fixed Indexed Annuities and Fixed Annuities.
Premiums paid for fixed-rate annuities are invested with the insurance company’s general funds, chiefly in fixed income types of securities, with the ultimate purpose of providing a level annuity income.
Though the fixed-rate annuity affords the contract owner a guaranteed rate of return, that rate is dependent upon the length of time the funds will be invested. Though the most common maturity periods for annuities are three and five years, the longer the commitment, the higher the guaranteed rate of return for the contracted period.
With a fixed annuity, the contract owner is protected against rising or declining interest rates, stock market gains or losses, and insurance company profits or losses by assuring the safety of principal and the exact interest the money will earn.
This assurance is appealing to conservative investors, while moderate to aggressive investors may use this type of annuity as a stabilizing factor in an overall portfolio.
A Fixed Indexed Annuity is a fixed annuity, either immediate or deferred, that earns interest or provides benefits linked to an external equity reference or equity index.
The value of the index might be tied to a stock or other equity index. One commonly used index is the Standard & Poor’s 500 Composite Stock Price Index, also known as the S&P 500.
When you buy a Fixed Indexed Annuity, you own an insurance contract. You are not buying shares of any stock or index. While growth depends on the growth of the index strategy chosen, the money is not invested in the stock market and can never fall below the amount gained and accumulated in the fund account, according to contract terms.
Fixed indexed annuities, like other fixed annuities, promise to pay a minimum interest rate. The rate applied will not be less than the minimum guaranteed rate, even if the index-linked interest rate is lower. The value of your annuity also will not drop below a guaranteed minimum.
Fixed indexed annuities cannot lose the accumulated gains, but can lose value based on how much income is taken out of the annuity. While funds are being depleted because of income taken, the remaining funds left in the annuity can continue to grow.
This type of annuity may also offer riders, such as riders for disability, nursing home stay, long term care, and terminal illness. Most annuities allow withdrawals without surrender penalties up to a certain amount per year, and may provide a death benefit to a survivor or beneficiary if funds remain.
Fixed indexed annuities can grow tax-deferred without risking accumulated gains according to the terms of the contract.
An annuity is an insurance product purchased from an insurance carrier and designed to help protect retirement income from risks such as market exposure or outliving your money.
No. Although annuities are sold through the insurance industry, they are not life insurance coverage. They are generally used as retirement income or tax-deferred investment tools.
State guaranty associations provide certain protections for policyholders if an insurance company becomes insolvent, subject to state limits and laws.
Annuities are generally divided into fixed and variable types, with Fixed Indexed Annuities acting as a hybrid that includes characteristics of both fixed and variable annuities.
An immediate annuity is designed to begin income payments shortly after purchase, sometimes in as little as 31 days, and is often funded with a single payment.
A deferred annuity is used when income payments are needed at a future date. It allows funds to grow over time before income payments begin.
A Fixed Indexed Annuity is a fixed annuity linked to an external index, such as the S&P 500. You own an insurance contract, not shares of the index, and contract terms may protect accumulated gains.
Annuities can be structured for income, inflation, growth, return of principal, and tax advantage. An experienced advisor can help fit annuities into a larger retirement plan.
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