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Volume 3 Number 4
January 23, 2006

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Educate Yourself on Annuities

A recent Florida law has helped curb abusive sales practices by unscrupulous insurance agents selling annuities to seniors.

"Annuities can be an effective investment tool for many Floridians wanting a steady stream of income for retirement,” said Tom Gallagher, chief financial officer of Florida. “But too many of our state’s seniors have been preyed upon by agents who are motivated by commission payments, not consideration of a senior’s financial circumstances. Florida law now holds companies and agents accountable for the products they sell and the investment advice they give.”

An annuity is an insurance contract that offers a guaranteed series of payments over a period of time. Insurance companies and agents offering annuity products to seniors over the age of 65 are required to clearly document the basis for selling the product, including consideration of a senior’s financial and tax status, as well as investment objectives. The Department of Financial Services has the authority to take corrective action if a company or agent violates the law.

Gallagher helped pass this law in response to calls and letters from hundreds of seniors and their families who told the department they were convinced to liquidate CDs, stocks and savings accounts to fund annuities only to discover these actions robbed them of access to their savings.

Over the past few years, there has been a significant increase in annuity sales to senior citizens. There continues to be confusion among consumers about annuities and some questionable sales practices. Here is some important information that will help you if you are considering purchasing an annuity.

What is an Annuity?

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 you have paid. Annuities are often bought for future retirement income.

Is an Annuity Right for You?

You should think about what your goals are for the money you may put into the annuity, as well as how much risk you are willing to take. Ask yourself the following questions:

How much retirement income will you need in addition to what you will get from Social Security and pension? Will you need that additional income only for yourself or for yourself and others? How long can you leave money in the annuity and does the annuity let you take out money when you need it? Is this a single premium or multiple premium contract? For a fixed annuity, what is the initial interest rate and how long is it guaranteed?  Can I get a partial withdrawal without paying surrender or other charges and is there a death benefit?

Types of Annuities

  • Single Premium Annuity: An annuity where you pay the insurance company only one premium payment.

  • Multiple Premium Annuity: An annuity where you pay the insurance company multiple premium payments.

  • Immediate Annuity: An annuity where income payments to you start no later than one year after you pay the premium.

  • Deferred Annuity: An annuity where income payments to you start many years later.

  • Fixed Annuity: An annuity where your money, less any applicable charges, earns interest at rates set by the insurance company or in a way specified in the annuity contract.

  • Variable Annuity: An annuity where the insurance company invests your money, less any applicable charges, into a separate account based upon the risk you want to take. The money can be invested in stocks, bonds or other investments. If the fund does not do well, you may lose some or all of your investment.

  • Equity-Indexed Annuity: A variation of a fixed annuity where the interest rate is based on an outside index, such as a stock market index. The annuity pays a base return, but it may be higher if the index goes up.

Review Your Contract Carefully

As with any insurance product, always review the contract and be sure you understand the terms and conditions, as these will vary from contract to contract. Ask the agent and/or company for an explanation of anything you do not understand. Do this before any free look period ends. This period gives you a set number of days to look at the annuity contract after you buy it. If you decide during that time that you do not want the annuity, you can return the contract and get all your money back.

Tax Treatment of Annuities

You should consult a professional tax advisor to discuss your individual tax situation.