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Frequently Asked Questions
Annuities
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Frequently asked questions
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What are annuities?
An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. You buy an annuity by making either a single payment or a series of payments. Similarly, your payout may come either as one lump-sum payment or as a series of payments over time.
Why do people buy annuities?
People typically buy annuities to help manage their income in retirement. Annuities provide three things:
Periodic payments for a specific amount of time. This may be for the rest of your life, or the life of your spouse or another person.
Death benefits. If you die before you start receiving payments, the person you name as your beneficiary receives a specific payment.
Tax-deferred growth. You pay no taxes on the income and investment gains from your annuity until you withdraw the money.
What kinds of annuities are there?
There are three basic types of annuities, fixed, variable and indexed. Here is how they work:
Fixed annuity.
The insurance company promises you a minimum rate of interest and a fixed amount of periodic payments. Fixed annuities are regulated by state insurance commissioners. Please check with your state insurance commission about the risks and benefits of fixed annuities and to confirm that your insurance broker is registered to sell insurance in your state.
Variable annuity.
The insurance company allows you to direct your annuity payments to different investment options, usually mutual funds. Your payout will vary depending on how much you put in, the rate of return on your investments, and expenses. The SEC regulates variable annuities.
Risks of Variable annuities: (Understanding Fees & Charges)
Variable annuities have a number of features that you need to understand before you invest. Understand that variable annuities are designed as an investment for long-term goals, such as retirement. They are not suitable for short-term goals because you typically will pay substantial taxes and charges or other penalties if you withdraw your money early. Variable annuities also involve investment risks, just as mutual funds do.
2. Note that if you sell or withdraw money from a variable annuity too soon after your purchase, the insurance company will impose a “surrender charge.” This is a type of sales charge that applies in the "surrender period," typically six to eight years after you buy the annuity. Surrender charges will reduce the value of -- and the return on -- your investment.
3. You will pay several charges when you invest in a variable annuity. Be sure understand all charges before you invest. Besides surrender charges, there are a number of other charges, including:
4. Mortality and expense risk charge. This charge is equal to a certain percentage of your account value, typically about 1.25% per year. This charge pays the issuer for the insurance risk it assumes under the annuity contract. The profit from this charge sometimes is used to pay a commission to the person who sold you the annuity.
Administrative fees. The issuer may charge you for record keeping and other administrative expenses. This may be a flat annual fee, or a percentage of your account value.
Underlying fund expenses. In addition to fees charged by the issuer, you will pay the fees and expenses for underlying mutual fund investments.
Fees and charges for other features. Additional fees typically apply for special features, such as a guaranteed minimum income benefit or long-term care insurance. Initial sales loads, fees for transferring part of your account from one investment option to another, and other fees also may apply.
Penalties. If you withdraw money from an annuity before you are age 59 ½, you may have to pay a 10% tax penalty to the Internal Revenue Service on top of any taxes you owe on the income.
Indexed annuity.
This annuity combines features of securities and insurance products. The insurance company credits you with a return that is based on a stock market index, such as the Standard & Poor’s 500 Index. Indexed annuities are regulated by state insurance commissioners
Annuities vs CD's?
(Certificates of Deposit)
CD’s do not offer the most competitive interest rates, or a guarantee of future rates.
CD’s do not have any tax advantages ― they are taxed each year.
CD’s are not age advantaged ― they offer no additional benefits whether you’re age 6 or 66.
CD’s can be garnished or seized.
CD’s cannot be liquidated without substantial penalties, and the withdrawal charges never end.
CD’s have no lifetime income guarantee.
CD’s are subject to probate.
CD’s will not waive charges if you are terminally ill, or confined to a nursing home.
CD’s are countable assets in Medicaid calculations.
CD’s are only as safe as the bank that holds them.
What is Investor Preparedness Checklist?
Are you prepared for your financial future?
Use the checklist to get started.
Go to Investor.gov
for free tools and information about investing.
Identify your financial goals.
Create a savings and investment plan based on your goals.
Pay off high-interest debt first.
Participate in your company’s 401(k) plan and max out any employer match.
Use Investor.gov to do a background check on any investment professional to make sure they’re registered.
Understand your risk tolerance.
Understand investment fees and their impact on returns.
Research all investments thoroughly.
Check your investments regularly and maintain a diversified portfolio.
Avoid investment opportunities that sound too good to be true.
What is Pension Maximization Strategy?
Pension Maximization is a retirement strategy which involves a specially constructed life insurance policy that seeks to provide similar, and potentially greater and more flexible, survivor benefits at the death of the retiree.
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