Annuities
What is it?
An annuity is a contract sold by an insurance company that protects principle and guarantees a future income for a specific amount of time or for the rest of your life. You can purchase an annuity with a lump sum of money or by periodic payments over years. There are three major categories of annuities with two sub-types in each category.
Types of Annuities
Which annuity fits your into your financial goals?
Fixed Annuity
Also considered “traditional” this is the most basic type of annuity. Consider this as a pension, but instead of offered to you by an employer, it’s your personal pension. Fixed annuities earn a pre-determined amount of interest usually between 2-3%. This type of annuity is for those that have a low risk tolerance and don’t like to lose money.
Indexed Annuity
Interest earned in this annuity is tied to the performance of an index such as the S&P 500. The interest is usually capped at a certain percentage, but in exchange, you receive 100% principle protection so you cannot lose any money. Most indexed annuities have a guaranteed minimum interest rate. Slightly more risky than a traditional fixed annuity.
Income Options
All three types of annuities can either be Immediate or Deferred in regards to when your income begins. The question to ask yourself is, “Do I want income now or at a later date?” As with most things in life, the are trade-offs to be considered when making your decision.
Immediate Annuity
An immediate annuity is what the name implies, your income begins immediately. This type is purchased with a lump sum of money. This could be from either a life insurance benefit, a 401(k) or IRA, or an inheritance to list some examples.
Deferred Annuity
With a deferred annuity, you are deferring your income until a later date. This allows for larger income payments as the money has a longer time to grow before you start your income stream. This is called an accumulation period.
Annuity Payout Options
There are a few different payout options that you can choose from depending on your financial needs
This option allows you to receive income for the rest of your life. This is limited to your life only and does not include the life of your spouse/beneficiary. This provides the highest income. If you die before all of your money has been paid out to you, the insurance company keeps the remainder.
This option is very similar to the single life payout option. The key difference is this option guarantees a minimum number of payments – 10 or 15 years. If you happen to die before the time period is up, your beneficiary will receive payment for the number of years left. This option reduces your monthly benefit.
This options guarantees payments for the entirety of both your life and your beneficiary, typically a spouse. This reduces your monthly benefit since it takes into consideration the life expectancy of both you and your beneficiary.
This option allows you to receive the entire value of your annuity in one lump sum payment. This option is not typically recommended except for in extenuating circumstances. This can drastically increase your tax burden as the IRS will require you to pay income taxes on the amount received.
This options allows you to decide the amount and frequency of your payments you wish to receive. However, this options can forfeit any guarantees the insurance company offers. The burden of lifetime income is now on you instead of the insurance company.
Annuity Benefits
Annuities have key benefits that can align with your unique financial goals
No Contribution Limits
Guaranteed Growth
Principal Protection
Guaranteed Income for Life
FAQs
With most annuities there are no fees in the contract. All of your money goes into your policy. The only time you might have to pay a fee is if you add optional riders, but the fees associated with those will be discussed before any decisions are required.
That depends entirely on the contract. Annuities can be as short as 3 years or as long as 10 years before you can access your money without a surrender fee. All surrender time frames will be thoroughly discussed to make sure you are making the right decision for yourself.
Most of the time annuities are tax-deferred meaning they are funded with pre-tax money. You will have to pay tax on any income you receive from your annuity.
What you are asking about is called the “free-look period”. This time frame changes depending on the state but in North Carolina the free-look period is 10 days. You have 10 days from the day you sign the contract to receive 100% of your money back without any fees.
You can take out up to 10% of your contract value without any fees – you still have to pay taxes as if this was income, though. In the event of an emergency such as a terminal illness many contracts have riders that allow you to access your funds without a surrender penalty. Each annuity is different so be sure to check with your agent before withdrawing any funds.
No. All agents are compensated by the insurance carrier. 100% of your money goes into your contract.
Most annuity contracts will pay your beneficiary 100% of your account balance without any fees or penalties. Keep in mind that if you have received income from your annuity already, the account balance will be the starting amount less any income. This is the death benefit of your annuity.
Certainly! We help clients do this all the time. If you are still working and looking to protect your retirement fund, you cannot move your money until age 59 and a half.