What is a Fixed Annuity?
With a Fixed Annuity, the insurance company guarantees both the rate of return (the interest rate) and the payout to the investor. Although the word “fixed” might suggest otherwise, the interest rate on a fixed annuity can change over time. The contract will explain whether, how and when this can happen. Often the interest rate is fixed for a number of years and then changes periodically based on current rates. Payouts can be for an entire lifetime, or you can choose another time period.
While you are accumulating assets in a deferred fixed annuity, your investment grows tax-deferred. The insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. With an immediate fixed annuity—or when you “annuitize” your deferred annuity—you receive a pre-determined fixed amount of money, usually on a monthly basis (similar to a pension). These payments may last for a specified period, such as 25 years, or an unspecified period such as your lifetime or the lifetime of you and your spouse.
The predictability of a fixed annuity makes it a popular option for investors who want a guaranteed income stream to supplement their other investment and retirement income. Fixed annuity payouts are not affected by fluctuations in the market, so they can provide peace of mind for investors who want to ensure that they will have enough money to carry them through retirement and cover identified future expenses.
Things to Consider
While a fixed annuity can remove market risk from your returns, there are other risks to consider when deciding if a fixed annuity is for you.
- An annuity’s “guarantee” is only as strong as the insurance company that issues the annuity. There may be state guarantees in the event of an insurance company’s failure, but annuities are not guaranteed by the FDIC, SIPC or any other federal agency if the insurance company that issues the contract fails.
- Payments in a fixed annuity typically do not have cost-of-living adjustments to keep pace with inflation, so the value of the money you receive in your payments may decline over time. Annuities with inflation protection can be purchased but the cost, in general, is significantly higher.
- It may be difficult to get your money back once you pay the premium to the insurance company. Even if you only receive a few payments under a fixed annuity contract, the insurance company may not be obligated to continue payments to your spouse or refund your premiums to your estate.
- If there are changes to your fixed annuity and you want to withdraw your money early, you could incur surrender charges that cut into your returns.
Fixed Annuity Regulation
Fixed annuities are regulated by state insurance commissioners. Be sure to check with them to confirm that your insurance broker is registered to sell insurance in the state, and inquire about whether your state has a guaranty association that provides some level of protection if an insurance company doing business in that state fails.
Source:
FINRA.orgWhat is a Fixed Indexed Annuity?
Fixed Indexed Annuities—also known as “equity-indexed annuities” or “indexed annuities”—are complex financial instruments that have characteristics of both fixed and variable annuities. Indexed annuities offer a minimum guaranteed interest rate combined with an interest rate linked to a market index, hence the name.
Many indexed annuities are based on broad, well-known indices like the S&P 500 Composite Stock Price Index. But some use other indexes, including those that represent other segments of the market. Some indexed annuities allow investors to select one or more indexes. Because of the guaranteed interest rate, indexed annuities give you more risk (but more potential return) than a fixed annuity, but less risk (and less potential return) than a variable annuity.
Things to Consider
A sales representative may describe an indexed annuity as a simple and easy-to-understand product. However, FINRA has warned that indexed annuities can be quite complex. One of the most confusing features of an indexed annuity is the method used to calculate the gain in the index to which the annuity is linked. There are several indexing methods firms use to calculate gains. The method used for your annuity matters because it will impact the calculation of the amount of interest to be credited to the contract based on the change in the index. Because of the variety and complexity of the methods used to credit interest, investors will find it difficult to compare one indexed annuity to another.
You also may hear that an indexed annuity product provides market-like returns with no risk and no loss on your investment. Indexed annuities offer protection on downside risk with a guaranteed minimum return, typically at least 87.5 percent of the premium paid at 1 to 3 percent interest. However, if you don’t receive any index-linked interest—in other words, if the index linked to your annuity declines—you actually can lose money on your investment. And, if you surrender your annuity early, you may have to pay a significant surrender charge along with a 10 percent tax penalty that will reduce or eliminate any return.
Before purchasing an indexed annuity, make sure you not only understand each feature, but also how the features work together, because this combination can have a significant impact on your return. You should also understand any fees or expenses that come with a particular product. Indexed annuities can be expensive and have been known to have substantial surrender charges if you surrender the policy early, and you may incur a tax penalty that could reduce or eliminate any return. Be prepared to ask your insurance agent, broker, financial planner or other financial professional specific questions to determine whether an indexed annuity is right for you.
Regulation
Indexed annuities are regulated by state law. If you have questions about a particular product, contact your state insurance commissioner. You can also check out whether the person selling an indexed annuity is registered with FINRA.
Source:
FINRA.org
What is an Immediate Annuity?
An annuity purchased with a single premium on which income payments begin within one year of the contract date. With fixed immediate annuities, the payment is based on a specified interest rate. With variable immediate annuities, payments are based on the value of the underlying investments. Payments are made for the life of the annuitant(s), for a specified period, or both (e.g., 10 years certain and life).
Source:
IRIonline.org
Things to Consider
While an immediate annuity can remove market risk from your returns, there are other risks to consider when deciding if an immediate annuity is for you.
- An annuity’s “guarantee” is only as strong as the insurance company that issues the annuity. There may be state guarantees in the event of an insurance company’s failure, but annuities are not guaranteed by the FDIC, SIPC or any other federal agency if the insurance company that issues the contract fails.
- Payments in an immediate annuity typically do not have cost-of-living adjustments to keep pace with inflation, so the value of the money you receive in your payments may decline over time. Annuities with inflation protection can be purchased but the cost, in general, is significantly higher.
- It may be difficult to get your money back once you pay the premium to the insurance company. Even if you only receive a few payments under an immediate annuity contract, the insurance company may not be obligated to continue payments to your spouse or refund your premiums to your estate.
- If there are changes to your fixed annuity and you want to withdraw your money early, you could incur surrender charges that cut into your returns.
Immediate Annuity Regulation
Immediate annuities are regulated by state insurance commissioners. Be sure to check with them to confirm that your insurance broker is registered to sell insurance in the state, and inquire about whether your state has a guaranty association that provides some level of protection if an insurance company doing business in that state fails.
Source:
FINRA.orgWhat is a Structured Annuity?
A Structured Annuity is a variable annuity contract with an insurance company where your rate of return is based on an Index that can increase or decrease over the Term and have any decrease protected up to a set amount.
Things to Consider
Terms are typically offered from 1 to 7 years and are measuring periods within the length of the contract; and each Index and Term will come with a few Protection Level/Cap Rate choices.
At the end of the Term the Protection Level will refund any account decrease up to the level of protection as well as limit gains via Cap Rates that vary depending on the Term and Protection Level.
It is possible that the Index losses exceed your Protection Level and you lose some of your investment principal; and Cap Rates can limit your gains if the Index increases above the Cap Rate levels.
Typically, longer Terms offer higher Cap Rates however, Cap Rates are reduced as Protection Levels increase. The lower the Protection Level the higher your potential Cap Rate can be and the greater the Protection Level the lower your potential Cap Rate can be.
Standard Structured Annuities offer tax-deferred gains and some offer a return of principal less withdraws to your beneficiaries if you pass away.
Fees and Expenses
Some contracts have fees and expenses such as administrative fees, investment management fees and other fees that can vary with performance and some offer no fee options. If you buy your annuity in an IRA, there can be an IRS penalty of 10% to make withdraws prior to age 59 ½ and all contracts have cancellation fees known as Surrender Charges.
Be sure to read over the contract and prospectus carefully before you invest and consult with your AnnuityNest expert to determine if a Structured Annuity is right for you.
Disclaimer:
Variable annuities are long-term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They have fees and charges, including mortality and expense risk charges, administrative fees, and contract fees. They are sold only by prospectus. Guarantees are based on the claims paying ability of the issuer. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value.
Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company.
What is a Variable Annuity?
As its name implies, a variable annuity’s rate of return changes with the stock, bond and money market funds that you choose as investment options. Variable annuities are sometimes compared to mutual funds because they offer similar investment features, including investment choices—called “separate accounts”—that resemble mutual funds. However, they are different products.
A typical variable annuity offers three basic features not commonly found in mutual funds:
- tax-deferred treatment of earnings;
- a death benefit; and
- annuity payout options that can provide guaranteed income for life.
While a variable annuity has the benefit of tax-deferred growth, its annual expenses are likely to be much higher than the expenses on a typical mutual fund. And, unlike a fixed annuity, variable annuities do not provide any guarantee that you will earn a return on your investment. Instead, there is a risk that you could actually lose money.
In general, variable annuities have two phases: (1) the “accumulation” phase, when the premiums you pay are allocated among investment portfolios, or subaccounts, and your earnings on these investments accumulate; and (2) the “distribution” phase, when the insurance company guarantees a minimum payment to you based on the principle and investment returns (positive or negative).
During the accumulation phase, it can be difficult and costly to access the money you’ve invested. You often have to pay what are called “surrender charges” to withdraw your money early—and you might incur tax liabilities on the earnings your investment has made. In the distribution phase, you typically can choose to withdraw money in a lump sum or as a series of payments over time. Regardless, your distribution will depend on the performance of the investment options you chose.
Things to Consider
The variety of features offered by variable annuities can be confusing. For this reason, it can be difficult to understand what’s being recommended for you to buy. It’s smart to take the following steps, before you purchase a variable annuity:
- Fully understand all of its terms, fees and expenses, and carefully read the prospectus.
- Ask specific questions like how long your money will be tied up, whether the annuity has sales or surrender charges, and if the investment poses liquidity risks, has early withdrawal penalties or potential tax consequences.
- Find out whether the policy has a “free look” period that allows you to cancel an annuity purchase within a specific period if you have second thoughts.
- Ask how your broker is being compensated. In addition to annual fees and other charges, the sales person who sells you a variable annuity is likely collecting a commission for the sale. Variable annuities have many features that can drive up commission charges to customers. Sometimes, a salesperson will also receive special compensation for selling these products.
Fees and Expenses
Variable annuities typically have high annual fees and expenses, in addition to potential sales and surrender charges and early withdrawal penalties. These annual fees and expenses can include:
- Mortality and expense risk charges, which the insurance company charges for the insurance to cover guaranteed death benefits, annuity payout options that can provide guaranteed income for life or guaranteed caps on administrative charges.
- Administrative fees, for record-keeping and other administrative expenses.
- Underlying fund expenses, relating to the investment subaccounts.
- Charges for special features, such as stepped-up death benefits, guaranteed minimum income benefits, long-term health insurance or principal protection.
Make sure you understand all the fees, expenses and other charges related to the variable annuity recommended to you before you make a purchase.
Exchanging or Replacing Your Current Annuity
If you already have a variable annuity, you may be presented with an option to exchange or replace it. There can be benefits to what is called a “1035 exchange,” which refers to a provision in the U.S. tax code that permits a direct transfer of funds in a life insurance policy, endowment policy or annuity policy to another policy without tax consequences.
If you consider exchanging or replacing your annuity, be sure to do a close comparison with your existing annuity, and only make a change when it is better for you, and not just better for the person trying to sell you a new product. Remember that exchanging one contract for a new one usually means the clock restarts for purposes of early withdrawal penalties.
Variable Annuity Regulation
Variable annuities are securities registered with the Securities and Exchange Commission (SEC), and sales of variable insurance products are regulated by the SEC and FINRA.
Source:
FINRA.org
