Annuity Basics

Annuities are term deposits with insurance companies. They are similar to certificates of deposits at the bank (note: bank deposits are FDIC insured while annuities are guaranteed by the issuing insurance company).

There are two types of annuities:
fixed and variable.

Fixed annuities have these features:

• Your principal is guaranteed, it will never decline
• The insurance company adds interest to your deposit each year
• The annuity is for a specific term that you select. Generally, the longer the term, the higher the interest
• All interest is tax deferred (you do not report it on your tax return) until withdrawn
• You may withdraw 10% of your balance annually
• If you withdraw more than 10% during the term, you will pay withdrawal penalties (called surrender charges)

Most fixed annuities offer an initial one year rate and then the rate changes each year. A few companies offer a locked-in rate for the entire period. We recommend that investors always get a locked in rate.

Fixed annuities are the safest, most conservative choice.

Another type of annuity is called a variable annuity. With this type of annuity, rather than receiving interest from the insurance company, your money is invested into stock or bond accounts. You may earn more or you could lose principal, depending on the accounts you select and if the stock and bond markets rise or fall. Variable annuities are the riskiest choice.

Maybe the best choice is an index annuity. In this type of annuity, your principal is guaranteed like the fixed annuity, but your interest each year is based on increases in the S&P 500 index (this is an index based on 500 large stocks, such as IBM, General Motors, Intel, etc). So, your interest is tied to performance in the stock market but you can never lose principal. You get the guarantee of a fixed annuity with the potential profit of a variable annuity.

Everything described up until this point describes the growth phase (called the accumulation phase) of the annuity.

When and how do you get your money out? At the end of the term, you have three options:

• You can leave the annuity alone and continue to let it grow
• You can exchange the annuity to another company that may pay you a higher rate

You can start to make withdrawals

The withdrawal phase is called the distribution phase. You have three options:

• You may withdraw all of your money at once
• You can withdraw some money each year based on your desires
• You can annuitize the policy.

Annuitizing means that you accept fixed monthly payments from the annuity company. The payments can span your lifetime or be limited to a specified period (e.g. 10 years). At the end of the period you select, the annuity is completely paid out. If you select a lifetime payout, the payments will continue for as long as you live.  As you might imagine, the monthly payments are usually more for a fixed 10 year payout than if you select a lifetime payout (the option which pays the most depends on your age). Annuitizing may or may not be a good deal and depends on your circumstances.

If you are single and need to maximize your monthly income, the lifetime payments may be a very good deal. On the other hand, if you want to leave money to your heirs, annuitizing would not be good because there will be nothing left at the end of the annuitization period. Please call us at 816-448-3728 and set an appointment and we are happy to help you select the best option.

What is an immediate annuity? An immediate annuity has no accumulation phase. You make a deposit with the insurance company and immediately begin receiving payments. These annuities are generally suited for senior investors (age 70 plus) who desire to increase their monthly income.

Questions? Or would you like to have your current annuity analyzed?
Call us at 816-448-3728. There is no charge for an initial appointment