An annuity is a financial product that pays periodic income benefits for a specific period of time or over the course of the annuitant’s lifetime. There are two basic types of annuities: deferred and immediate. Deferred annuities allow assets to grow tax-deferred over time before being converted to payments to the annuitant. Immediate annuities allow payments to start immediately (normally within a year of purchase). The Premium for an annuity can be paid in a lump sum (single premium), or spread over a period of installments (flexible premium).
Annuity products primarily offer a source of income, either now or at a set future date, such as retirement. Annuities may also have tax advantages. For example, a deferred annuity accumulates tax-deferred interest until you withdraw the funds. If this is not what you are seeking, then you may wish to consider other types of investments. Annuities normally involve a long-term commitment. More appropriate investments exist for those seeking short-term opportunities (i.e., less than a decade).
It is always a good idea to consult a financial adviser who has no vested interest in your investment choice before making a decision. Many annuity marketing programs encourage you to move funds from maturing certificates of deposit into annuities. These are not comparable investment instruments because they have different purposes and time frames. You should invest your money in a way that suits your specific needs.
Insurance companies and agents offering annuity products to seniors older than 65 must clearly document the basis for selling the product, including consideration of a senior’s financial and tax status, as well as investment objectives. You should consider all of the consequences if you currently have funds in an annuity and the opportunity arises to move the funds into a new annuity with a new surrender charge schedule. Also, the guaranteed minimum interest rate in the new contract may be lower. Be sure you consider both the advantages and disadvantages of the replacement purchase.
You should review the complete plan, considering such factors as the guaranteed interest rate, the surrender charges, and the administrative and maintenance fees. A high interest rate during the first year is not always the better choice. This is especially true if the interest rates drop to a low minimum rate the next year combined with high surrender charges and additional fees.
A charitable gift annuity is a simple contract between the donor and the charity. A charitable gift annuity is generally intended to serve as a gift to a charity rather than income. An individual agrees to donate cash, stock, or other assets to a charity. In return, the donor receives a fixed payment, called an annuity, for life plus tax benefits.
The charity tries to structure each annuity arrangement so that it can manage donations and make annuity payments. These arrangements are set up for the benefit of the charity and are structured so that half of the initial donation remains when the donor dies.
Often, smaller charities with limited resources and staff encourage financial planners or insurance agents to suggest that their clients purchase commercial annuities and make the charities the beneficiaries. The planners or agents may receive commissions, but the commissions typically do not reduce the size of the gifts.
Consumers should be aware of the following:
The donation is irreversible and can never be retrieved from the charity, even if there's a personal emergency or the charity goes bankrupt. Also, if the donor dies, his or her heirs have no claim to the donation.
Gift annuity payments are fixed - there is no inflation protection. They never go up or down.
Charitable Gift Annuities are not insured. The Florida Life and Health Insurance Guaranty Association does not provide coverage for policies and contracts from non-licensed insurers. A charity could become insolvent and be unable to make annuity payments. It is important to research the organization you are interested in donating to, including its short-term and long-term financial situation, and the structure of its annuity reserve fund. Also examine how much of a charity's donations go to overhead and how much actually goes to charitable work.
Annuity payments may be tax-free partial returns of the donor's gift based on actuarial tables of life expectancy. The older the donor, the higher the annuity payment the donor can lock in. These rates generally are lower than what a person could receive by purchasing a commercial annuity, but the tax deduction partially offsets that.
401-K: A 401-K plan is a type of tax-qualified deferred compensation plan in which employee’s can contribute a portion of their wages to the plan on a pretax basis. These contributions are not subject to income tax until they are withdrawn. The amount that an employee may elect to defer to a 401K plan is limited. Also, many plans allow employees to make hardship withdrawals because of immediate and heavy financial needs. However, there are limits to the amount that can be withdrawn for a hardship. Additional information may be obtained by visiting the Internal Revenue Service’s website at http://www.irs.gov/taxtopics/tc424.html.
403-B: A 403-B plan is a type of tax-qualified deferred compensation plan in which certain employee’s can contribute a portion of his/her wages to the plan on a pretax basis.
Annuitant: The owner of the annuity.
Annuitize: When you annuitize, you start taking income from an annuity.
Beneficiary: The person designated to receive the proceeds of the annuity contract upon the owner’s death.
Deferred Annuity: An annuity that provides for payout at a future date.
Free-Look Period: The period of time you have to inspect the product and request cancellation without penalty.
Immediate Annuity: An annuity purchased with a lump sum and provides for immediate payout.
Maturity Date: The maturity date is determined when you purchase an annuity. It is the date on which you can begin receiving payments from your annuity. You will be asked at the time of maturity to select a settlement option. The settlement option determines how you will receive payments from your annuity.
Surrender Charges (Penalties): A penalty charged when an annuity is terminated during the time period specified in the contract.
Fixed Annuities: A fixed annuity provides fixed-dollar income payments backed by the guarantees in the contract. You cannot lose your investment once your income payments begin. The amount of those payments will not change. With fixed annuities, the company bears the investment risk.
Equity Indexed Annuities: Is an annuity, either immediate or deferred, that earns interest or provides benefits that are linked to an external equity index, such as Standard and Poor's 500 Composite Stock Price Index. When you purchase an equity-indexed annuity, you own an insurance contract not shares of any stock or index.
Variable Annuities: Variable annuity investments are securities, which tend to fluctuate with economic conditions. The value of a variable annuity depends upon the value of the underlying investment portfolios associated with the annuity. The owner bears the investment risk for the value of the security. The value of the annuity will increase with a favorable investment performance of the security. The annuity's value will decrease with a poor investment performance. In fact, you can lose your investment. A product receives the classification of a variable annuity if the value during either the accumulation period or the payout period depends on the value of the security. Some variable annuities provide a choice of either a variable payout or a fixed payout.
Generally speaking, there are four basic forms a pay-out of an annuity might take:
The lump sum distribution method allows the contract owner to receive the balance of his account in a single payment.
The fixed period option provides that the annuity’s accumulated value will be paid out over a specified period of time, such as 10 or 20 years.
The fixed amount option, payments are made for a specific dollar amount and will last until the account balance is exhausted. When the annuity pay-out period begins, the terms of the contract are generally fixed and cannot be changed, regardless of the option selected.
The life income option, payments are made for the remainder of the annuitant’s life. Upon death, all payments stop and the company has no further obligations. Variations of this option provide limited guarantees beyond the life of the annuitant.
Knowing the answers to the following questions will assist you in choosing an annuity that fits your needs.
What is the guaranteed minimum interest rate?
Are there additional charges included in my premium?
Are there any charges deducted from my contract value and when?
What are the surrender charges or penalties if I want to end my contract early and take out all of my money?
How many years will I be subject to surrender charges?
Can I make a partial withdrawal without paying charges or penalties or losing earned interest?
Does my annuity waive withdrawal charges if I am confined to a nursing home or diagnosed with a terminal illness?
What are my income options when my annuity reaches its maturity date?
Equity Index Annuities: Additional information about how this type of annuity works.
Verify before you buy!!!! Contact us to verify the license of the agent and the insurance company before you sign the application for a policy.
Annuity Guides: The guides are excellent tools if you are shopping for a specific type of insurance and would like to gain a better understanding of all the aspects of the product prior to making your purchase.
Review your contract carefully!!!! As with any insurance product, always review the contract and be sure you understand the terms and conditions, since these will vary between policies. Ask the agent and/or company for an explanation of anything you do not understand. Do this before the free look period ends. The free-look period gives you at least 14 days to look at the contract once it is received. During the free-look period, you can return the contract and request a full refund.
Use caution when attending senior seminars! Seminars are a common way for annuity sales persons to market their particular products. Sometimes an offer of a free meal is really an invitation to a sales seminar. These seminars or the follow-up visit afterwards can involve high-pressure sales tactics. Be sure to ask the questions that appear in the section entitled.
Should you need additional information, you may speak with an insurance specialist between the hours of 8am–5:00pm at one of the telephone numbers listed below:
Out of State Callers: (850) 413-3089