Annuities: A General Overview
n annuity is a financial product offered by insurance companies. In this contract, you make either a lump-sum payment or a series of payments, and in return, the insurer agrees to make regular payments to you—either immediately or starting at a future date. Annuities are often used as a way to provide steady income during retirement and offer the advantage of tax-deferred growth. Some annuities also include a death benefit, which ensures your beneficiary receives a guaranteed* minimum amount (often equal to your total contributions).
RETIREMENT PLANS
Key Features of Annuities
No Contribution Limits:
Unlike retirement plans such as IRAs or 401(k)s, annuities do not have annual contribution limits.
- Tax Deferral: Earnings grow tax-deferred until withdrawals are made.
- Death Benefits: Many annuities offer a death benefit feature, guaranteeing your beneficiaries a minimum payout.
Important Considerations
1. Timing of Payouts- Immediate Annuities: Begin payments right after purchase—ideal for those needing income now. Deferred Annuities: Start payments at a future date, commonly at retirement.
2. Type of Investments- Fixed Annuities: The insurance company invests in stable assets like government and corporate bonds and offers a guaranteed* interest rate for a set period (1–10 years). Variable Annuities: You choose investment options, similar to mutual funds. Returns and future payouts vary based on the performance of your selected sub-accounts.
3. Liquidity- Some annuities allow annual withdrawals of interest or up to 15% of the value without penalties. However, early withdrawals (before age 59½) may be subject to income taxes and a 10% federal penalty.
Types of Annuities
Fixed Annuity: Offers a guaranteed* interest rate and fixed payment amounts for a specified or lifetime period. Not considered a security and not regulated by the SEC.
Variable Annuity: Allows you to invest in various sub-accounts. Payouts and returns fluctuate based on investment performance. These are regulated by the SEC.
Equity-Indexed Annuity: A hybrid option where returns are tied to a market index (e.g., S&P 500). While they often include a minimum guaranteed return, they do not track the index exactly and may not include dividends. Depending on the features, these may or may not be regulated by the SEC.
Before Purchasing an Annuity
Check the Financial Strength: Review the issuing insurance company’s credit rating.
Understand the Fees: Be aware of all associated charges, including management and surrender fees. Know the Withdrawal Rules: Early withdrawals may incur taxes and a 10% federal penalty if made before age 59½.
If you're thinking about purchasing an annuity, contact us to help evaluate your options and find the solution best suited to your financial goals. *Guarantees are backed by the claims-paying ability of the issuing insurance company.
