What is an Annuity?

1 What is an Annuity?

When you buy an annuity, you enter into a contract with an insurance company or a financial institution. You pay a premium – your capital investment. The insurance company or financial institution promises to pay you regular payments over a defined period of time, based on the size of your payment and other factors that define your agreement.

2

Why Might I Be Interested in Buying an Annuity?

If you fall within a tax bracket where an annuity will benefit you, and if you are interested in an investment vehicle that offers regular payments over a defined period of time, an annuity may be for you. Many investors consider tax deferred annuities as part of a retirement portfolio.

3 Deferred Annuity or Single Premium Immediate Annuity?

Deferred annuities are usually taxed deferred vehicles that are set up for retirement investing. Deferred annuities are complex and often misunderstood by investors. Single premium immediate annuities are exactly what they sound like. You pay one premium, and your income payments start immediately. Payments are determined by the amount of the premium you pay and your life expectancy. You choose the range of time over which to take payments – over the rest of your life or over a period of years. 

4 How Do Tax Deferred Annuities Work?

Buying an annuity is like buying insurance. You pay an amount up front or a series of regular payments over time. Money earns fixed or variable interest over time during what’s called the accumulation phase. During the payout phase, the insurer of the annuity makes regular payments to you through your lifetime. When you die, your beneficiary receives either the annuity value, or an established minimum amount, whichever is greater.

5 What are the Types of Tax Deferred Annuities?

Tax deferred annuities come in three types:

· Fixed annuity
· Variable annuity
· Equity-indexed annuity

6 What are the Pros and Cons of a Tax Deferred Fixed Annuity?

You earn interest at a guaranteed rate, for 1-10 years. Rates will never go below the fixed rate, though they may increase. This is a low risk investment in which you’ll avoid losses, but will sacrifice the large potential growth of investing in stocks or stock mutual funds.

7 What are the Pros and Cons of a Tax Deferred Variable Annuity?

You have potential for greater gains (and losses) with a variable annuity, since your contributions are invested in accounts that perform like mutual funds. For this service, however, you will pay relatively higher annuity management fees than you might for other types of annuities. Fees for variable annuities are usually higher than for comparable mutual funds.

8 What are the Pros and Cons of a Tax Deferred Equity-Indexed Annuity?

Similar to the fixed annuity, the equity-indexed annuity guarantees a fixed rate of interest and payments. Modeled after an index (like the S & P 500) and similar to other index funds, this annuity offers more potential for growth than the fixed annuity.

9 What Limitations of the Tax Deferred Annuity Should I be Aware Of?

Your annuity investment cannot be withdrawn until you’re at least 59-1/2, or you’ll pay a 10 percent penalty on your earnings. Other fees (called surrender fees) may apply if you draw upon the annuity before the period identified in your annuity contract. Annuity earnings are subject to income tax, rather than long term capital gains tax. The death benefit in your annuity also comes with a fee.

10 Is the Tax Deferred Annuity Right for Me?

Have you maxed out your other retirement investment options first? If you are eligible to contribute to a 401(k) plan or to an IRA, contribute to the allowable limit for these first. These investment vehicles offer the same (or sometimes better) tax breaks for you, without the fees that tax deferred annuities incur. Do you need the money in the short term? Consider a more liquid investment option. Tax deferred annuities have limits and penalties for early withdrawal. Depending upon your tax status and your tax bracket, you might need to hold on to an annuity for 15 years before you would benefit financially from withdrawing it. If you may not have enough in your retirement portfolio to fund you through the rest of your life, it may make sense to purchase an annuity. An annuity will guarantee you regular payments until your death. For further information about annuities, see: the U.S. Securities and Exchange Commission Web site on Annuities at http://www.sec.gov/answers/annuity.htm.