Annuities

Almost everyone in the market has seen at least some of their previous gains vanish before their eyes. What they should have done was talk to an expert before it was too late. Don’t be another sad statistic; secure your retirement with an annuity.

Annuities have benefits like...

• Growth potential with safety against any losses
• Tax Deferral (it’s your money not Uncle Sam’s)
• Protection from probate in many states
• Good rates of return that can be guaranteed
• And much, much more.

What is an Annuity?
Annuity Advantages
Variable Annuity
Fixed Annuity
Fixed Index Annuity
Annuities Vs. CD's
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What is an annuity?

In the simplest terms, an annuity is a contract between a client and the insurance company offering the annuity. Generally, annuities are offered as immediate or deferred. With an immediate annuity, payout begins immediately or shortly after the initial contribution is deposited into the annuity. With a deferred annuity, payout begins at a date in the future. This article focuses on deferred annuities.

A deferred annuity has two phases:

The purchase or accumulation phase, which is the period of time between the investment and when annuity payments begin; and
The payout or annuitization phase, the period of time that begins with the first annuity payout.

During the accumulation phase, the investor contributes money to the annuity — either in a lump-sum payment or in periodic, ongoing contributions. During this phase, the account value grows on a tax-deferred basis. This means money that would otherwise have gone toward income taxes remains in the account to grow. Remember that the value of the investment will fluctuate so that your units when withdrawn may be worth more or less than their original cost.

During the annuitization phase, the insurer makes either a lump-sum payment to the investor or a series of payouts that can occur over a certain period of time specified by the investor. Withdrawals from an annuity are taxable as income and a 10% tax penalty may apply to withdrawals prior to age 59 1/2.

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Annuity Advantages

Annuities offer a number of advantages that account for their popularity as retirement investment products. Generally, annuities

Fixed and Fixed Indexed Annuities can never loss Cash Value regardless of market conditions.
Are designed for long-term investors.
Provide tax-deferred growth.
Offer payout plans that provide an income stream during retirement, including an option that provides income for the lifetime of the annuitant or co-annuitant.
Permit transfer of the account value as the death benefit directly to the beneficiary. This generally avoids the cost and delay of probate.
Are available as a variable, fixed or combination annuity.

Annuities are long-term investments. Income taxes are payable upon withdrawal. Federal restrictions and a 10% federal tax penalty may apply to withdrawals before age 59½ if the annuity is funded with Qualified (IRA, 403b, 401k, etc..) funds. Surrender charges may apply.

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Variable Annuity

Many people invest in variable annuities to seek a hedge against inflation. This is because variable investment options have the potential, over time, to grow faster than the rate of inflation, depending on the performance of the securities market. Remember that the value of the investment will fluctuate so that your units when withdrawn may be worth more or less than their original cost.

When you invest in a variable annuity, your contributions are directed into your choice of variable investment options, which are sub accounts of the insurance company's "separate account" for annuity investments. Each subaccount invests in an investment portfolio created specifically for that variable annuity, and managed by investment professionals.

Instead of shares, you purchase "units of interest," and the value of these units rises and falls according to the performance of the sub account's investment portfolio.

Another feature of variable annuities is investment flexibility. You may tailor your investment strategy to meet your needs, even if those needs change. For example, you may:

Select from a variety of investment options, which may include stock, bond or stable value (fixed-interest rate) options to match your investment preferences, personal risk tolerance and retirement time horizon, depending upon your employer's retirement plan and the annuity provider.
Make tax-free and fee-free transfers of money among investment options in response to market conditions, or to reduce investment risk as you move closer to retirement.

Your beneficiary will receive the greater of either the value of your account or the sum of your contributions, less any withdrawals, outstanding loans or transfers to other options.

Investment values will fluctuate so that the investor's units, when redeemed, can be worth more or less than their original cost.

Annuities are long-term investments. Income taxes are payable upon withdrawal. Federal restrictions and a 10% federal tax penalty may apply to withdrawals before age 59½. Surrender charges may apply.

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Fixed Annuity

On the other hand, many individuals prefer a low-risk, fixed-rate account for retirement savings. For these individuals, the certainty of a known rate of return is more important than the potential to earn higher rates of return in the variable options.

Contributions to a fixed annuity are placed in the insurer's General Account, and the company, in turn, guarantees a certain credited interest rate. The insurer may pay interest over and above the guaranteed rate when market conditions warrant it. Rates may be renewed monthly, quarterly or annually and may increase or decrease, depending on the economy. But the insurance company guarantees the interest rate will never go below the guaranteed rate set at the time you purchase the annuity. Guarantees are subject to the claims paying ability of the insurer.

Your beneficiary will receive the greater of either the value of your account or the sum of your contributions, less any withdrawals, outstanding loans or transfers to other options.

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Fixed Index Annuity

So, while a fixed annuity may suit investors who aren't comfortable with the risk associated with securities investments, many individuals blend the stability of a fixed annuity investment with the potential for greater return from variable annuity investing. They do this by investing a portion of their money in fixed options and the rest in variable options. This type of investment is known as a combination annuity.

This flexibility has made annuities a highly valued investment alternative. With an annuity, you receive:

Tax-deferred growth, a feature offered by all types of annuities,
The potential to avoid the loss of purchasing power, a key feature of variable annuities, and
The comfort of a guaranteed interest rate (which is backed by the insurer), the hallmark of the fixed annuity.

Investment values will fluctuate so that the investor's units, when redeemed, can be worth more or less than their original cost. Annuities are long-term investments. Income taxes are payable upon withdrawal. Federal restrictions and a 10% federal tax penalty may apply to withdrawals before age 59½. Surrender charges may apply.

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Annuities Vs. CD's

Annuities and CDs (bank certificates of deposit) are similar in that they are safe, secure investments with guaranteed rate of returns based on interest rates, both issued by large financial institutions, CDs issued by banks, Annuities offered by insurance companies, but they both possess inherent differences as well.

The big differences are that while Annuities offer everything CDs offer, they carry several advantages.

1. Generally Higher returns
2. Tax-Deferral
3. Liquidity

CDs do have FDIC protection to guard against Bank or banking industry failure, but Annuities also have safety measures put in place by the state to ensure Insurance companies have reserve pools in place. Insurance companies may also be vetted for financial strength by obtaining their rating from objective rating firms -- Standard & Poor's, Moody's, A.M. Best or Duff & Phelps . The more solid the rating usually equates to a more solid financial backbone of Insurance Company.

Higher Returns:
Annuities, like CDs, are hinged to interest rates. But when rates are low so are CD returns whereas annuities have a minimum guarantee in place, usually 3% or 4%. Your investment will never dip below the guaranteed minimum interest rate during times of falling or low interest rates.

Again, low interest rates mean CD returns will be low as well. To offset the problem of low or falling interest rates, insurance companies equip annuities with guaranteed minimums. This is an agreed minimum rate of interest so that your investment is assured not to fall below the minimum performance even if CD rates do.

Tax-Deferral:
You pay annual taxes on CD interest earned without being able to withdraw funds until your investment term is over. With annuities, there is also a set term, but the earnings are tax-deferred. You only pay taxes on interest earned when money is withdrawn. So with annuities the deferred tax on your interest remains in the investment earning you more and more money, instead of being paid out to state and federal tax agencies on a yearly basis.

Liquidity:
CDs do not allow you to withdraw any monies during term. Period. Annuities have provisions that allow you to withdraw money, generally 10% of your account value annually plus many contracts allow you to remove the earned interest on a monthly basis. Several other contract provisions allow you access to all of your funds such as in the event you are hospitalized, undergoing a life-threatening illness, subjected to a permanent or extended stay in a nursing home, or other major calamities that affect you economically. In addition, annuities can be structured to pay-out for the life of the owner over a fixed term such as five or ten years, thereby spreading out your tax-burden and providing enhanced income security. In short, Annuities offer enhanced flexibility.

	Bank CD	Annuity
Loan privileges	No	Yes
Flexible premium	No	Yes
Avoidance of probate costs and delays	No	Yes
Withdraw for dollar-cost-averaging opportunities	No	Yes
Withdraw for required minimum distributions, penalty free	No	Yes
Potential Social Security tax advantage	No	Yes
Nursing Home Benefit	No	Yes
"Issue no money" capability	No	Yes
Bonus available on premium	No	Yes
Guaranteed lifetime income option	No	Yes
Potentially high yields	No	Yes
Tax-deferred Growth	No	Yes

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