Annuities can help you protect your financial future!
Annuities were simple investment products that worked like old-time corporate pension plans. A classic, fixed annuity, for example, paid out a regular amount of money to a retiree based on how much was put into the account over the years by the annuity owner, an employer or both.
Most of these traditional deferred annuities  provided the potential of a guaranteed stream of income for a lifetime, regardless of how much was originally invested by the annuitant. This guarantee, along with growing returns, helped spike consumer demand for annuity products.
In turn, insurance companies responded by feeding that demand with more sophisticated types of annuity contracts, including variable annuities that offered higher payments if the value of their underlying securities rose and locked in minimum payments when the investments fell.
Over the last decades more innovations followed. Insurance companies (generally a life insurance company) started to tailor annuities to the individual needs of investor. Within the two main categories – deferred annuities and immediate annuities – investors have hundreds of different annuity products to consider. All these products offer variations of payment and liquidity options, survivor benefits, investment models, guarantees against loss, plus many other choices. Structured settlements and single-premium annuities are included in these categories.
Simply stated, annuities are contracts between you and an insurance company. They are a form of a ‘reverse’ life insurance. While a life insurance policy pays the beneficiary upon death, annuities do the opposite: they pay annuitants (or their beneficiaries) while they are still living. Hence, annuities help meet an individual (the beneficiary) in retirement or realize another long-range financial goal.
As part of an annuity, you make a lump-sum payment or series of (smaller) payments. In return, the (life) insurance company agrees to make periodic payments to you beginning immediately or at some future date.
The Purpose of Annuities
Annuities are designed to insure – protect – the individual owner of an annuity (contract) against the risk of superannuation or outliving his or her income in retirement. Annuities were created to mitigate and avoid this risk by paying a guaranteed amount of money on a periodic (annual or monthly) basis to the beneficiary until death, even if the total payment exceeds the amount paid into the contract plus any accrued interest or gain.
Because the type of protection offered, you cannot withdraw funds penalty-free until you are age 59½.
Basic Characteristics of Annuities
Although there are many types of annuities, all annuity contracts are alike in several respects.
They stand alone as the only commercially-available investment vehicle that grows on a tax-deferred basis without having to be placed inside any type of IRA, qualified or other retirement plan.
Unless the contract is held in an IRA or qualified retirement plan, there is no limit to the amount of money that may be invested and contributions are non-deductible. (Of course, most annuity carriers have proprietary limits on the amounts that they will accept, but this is usually somewhere around 5 million dollars or so.)
Most annuity contracts also contain a declining surrender-charge schedule that eventually disappears after a given period of time, such as 5 or 10 years. For example, a 10-year fixed annuity contract may assess a 7% early withdrawal penalty for money taken out during the first year of the contract, a 6% penalty for money taken out during the second year and so on until the surrender charge schedule expires. Variable and indexed annuities usually levy similar charges for early withdrawals. However, many contracts will allow the investor to pull out 10-20% of principal each year without penalty as a means of easing this restriction as long as the investor is at least age 59½.
Annuity contracts can be purchased either inside or outside of an IRA or qualified plan. A check is written to the annuity carrier in either instance. They can also be acquired via 1035 exchange, where a maturing contract in a previous annuity policy, life insurance policy, or endowment policy is moved tax-free into an annuity policy with your preferred company. As far as life insurance, any type of cash value life insurance, such as whole, universal, or universal variable insurance can also be exchanged into an annuity.
How Annuities Work
The way annuities were originally designed, the annuity contract owner made either a lump-sum payment or a series of payments into the contract and then began receiving payments at retirement. The payments into an annuity are used to purchase accumulation units inside the contract, which, as their name implies, accumulate inside the contract until the time that payments to the beneficiary must be made.
At the end of a predetermined time, an event known as annuitization takes place. This event marks the conversion of accumulation units into annuity units, which annuity contracts can pay out to beneficiaries in several different ways. The contract owner essentially exchanges the dollar amount in their annuity for a series of guaranteed payments. This means they give up access to the larger, lump-sum, amount in order to receive a guaranteed lifetime income. Beneficiaries can choose among several types of payout options, including:
This type of annuity contract will pay out an actuarially-calculated amount to the beneficiary based upon his or her life expectancy. The amount will be paid even if the total payout exceeds the amount paid in plus interest or other gains. However, payments stop upon the death of the beneficiary, even if less than the value of the contract is paid back out. Theoretically, the insurance company keeps the contract value even if the beneficiary dies after receiving only one payment.
Life with Period Certain
This type of annuity contract will pay out either for life or for a certain amount of time (10 or 20 years). In contrast to Straight Life, if the beneficiary dies soon after payments begin, then the insurance company must pay out the period certain value of payments to the beneficiaries, either as a series of payments or a lump sum.
A Joint Life annuity contract is similar to Straight Life. However, in contrast to Straight Life, a joint life annuity continue to pay as long as one of the two beneficiaries is alive.
Joint Life with Period Certain
A Joint Life with Period Certain combines the period certain payout of a Life with Period Certain annuity contract with that of a joint life expectancy.
Do You Need an Annuity?
The simple answer to this question is that anyone who wishes to save more money for retirement than they are allowed to in their IRA or company retirement plans should consider an annuity as a supplemental funding vehicle.
There are also a few other reasons why those whose employers offer annuity contracts inside their retirement plans should consider them. For example, annuities can be used as tax shelters and as sources of guaranteed income for risk-averse investors.
Investment or Retirement Portfolio?
There is no simple answer to this question. Each investor should consider his or her age, time horizon, investment risk tolerance, and other objectives. However, the specific type of annuity in question should also be considered before purchasing an annuity contract..
While some investors may be better off with guaranteed fixed annuities, others may benefit from the growth potential of a variable contract. Also, there is generally no set recommended investment portfolio allocation percentage for annuities. Some investors may have no problem with their funds locked up inside an annuity, others may simply want to have only a small percentage of their total portfolio value in annuities.
Hence, there is no size that fits all. What benefits you can only be determined on a case-by-case basis. Make sure you take ample time to weigh the pros and cons with a trusted financial advisor.
Just like retirement accounts, annuities are a form of insurance designed to help you receive a steady flow of money well after your working years are over. While there are many benefits to annuities – they provide secure retirement savings for millions of Americans each year – make sure to review both pros and cons of annuities.
For more information contact us today and ask for your free no-obligation quote.We will help you explore a variety of insurance options and discounts. Call us at +1 800 645 0297 or email us. Alternatively, have an insurance-licensed Sunvalley Insurance representative contact you.
 Deferred annuities are long-term retirement investments with tax incentives. One of their advances is that they utilizing time to earn interest.