Annuities
Annuities are investment products that may be used to help you increase savings, protect your savings, or generate a stream of income. As pensions have become all but extinct, the allure of annuities has grown stronger. These tax-deferred investments offer tax-deferred growth potential, with underlying investments that can be fixed or variable. These annuities can turn a portion of your savings into a guaranteed income stream, starting on a date in the future. Some allow access to assets before or after income payments begin. Immediate income annuities can turn a portion of your savings into income for either the rest of your life or a set period of time, starting immediately. If you are approaching retirement and considering buying an annuity this is the most important message you will receive.
​
Do not buy an annuity until you meet with an independent advisor that can discuss ALL of the products available to meet your specific.
​
Annuities are designed to insure the contract owner against the risk of superannuation, which means outliving one’s income. Older investors who run out of money to support themselves face a dire dilemma. Annuities were therefore created in order to mitigate this risk.
​
These contracts are guaranteed to pay out at least a certain minimum amount on a periodic basis to the beneficiary until death, even if the total payments exceed the amount paid into the contract plus any accrued interest or gain. Because of this type of protection and the fact that you cannot withdraw funds penalty-free until you are age 59 1/2, annuities are considered retirement savings vehicles by nature.
Purpose of Annuities
​History of Annuities
Annuities have existed in one form or another since the Roman Empire. Citizens at that time would buy annual contracts from the Emperor. They would pay a lump sum to the Roman government in return for receiving an annual payment for the rest of their lives. European governments also offered a series of payments to investors in return for a lump sum investment now as a means of funding their wars during the 17th century.
How Annuities Work
The way these products were originally designed, the 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.
​
Then a one-time 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. Either way, 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:
​
- Straight Life. The contract will pay out an actuarially-calculated amount to the beneficiary based upon his or her life expectancy alone. This 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. The contract will pay out either for life or for a certain amount of time, such as 10 or 20 years. This prevents the possibility described above from happening. If the beneficiary dies soon after payments begin, then the insurance company must pay out the period certain worth of payments to the beneficiary, either as a series of payments or a lump sum.
​
- Joint Life. Similar to straight life, joint life annuities will continue to pay as long as one of the two beneficiaries is alive.
​
- Joint Life with Period Certain. Combines the period certain payout with joint life expectancy.
​
Or, without annuitizing, contract owners can withdraw money in the following ways:
​
- Systematic Withdrawal. A simple payment of either a fixed dollar amount or percentage of contract value paid out each year, either monthly, quarterly or annually.
​
-Lump Sum. As the name implies, lump sum is a single payment of the entire contract value. This payment can either be taken as a distribution or rolled over into another annuity contract.
How Annuities Work
Basic Characteristics of Annuities
Although there are many types of annuities, all annuity contracts are alike in several respects.
​
1. 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.
​
2. 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.
​
3. 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. 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 59 1/2.
​
Although there are many types of annuities, all annuity contracts are alike in several respects.
​
1. 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.
​
2. 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.
​
3. 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. 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 59 1/2.
​