Did you know that an annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments? In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. Annuities typically offer tax-deferred earning and may include a death benefit that will pay your beneficiary a guaranteed* minimum amount, such as your total purchase payments.

Unlike retirement plans, there is no limit to how much money you can put into an annuity! The number of annuity products on the market today can make selecting the most suitable annuity a confusing process.

Some facts to consider:

  • Timing of payoutimmediate or deferred: In an immediate annuity, the annuitant (you) begins receiving payments immediately after purchase. This is for individuals who need immediate income from their annuity. In a deferred annuity, payments begin at some future date, usually at retirement.
  • Investments by Insurersfixed: Insurance companies invest annuity assets in government securities and high-grade corporate bonds. They offer a guaranteed* rate (not always), typically over a period of one to twelve years. 
  • Liquidity options – An annuity may allow you to withdraw either your interest earnings or up to 15% per year without a penalty (although any withdrawal from an annuity may be subject to taxes and a 10% federal penalty if taken before age 59 1/2).

Types of annuities

  • Fixed annuity: A contract issued by an insurance company in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract.
    • The insurance company guarantees that you will earn a minimum rate of interest during the accumulation phase of the annuity. Plus, it guarantees that the periodic payments will be a set amount. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse. Fixed annuities are not securities and are not regulated by the SEC.
  • Fixed-indexed annuity is a "hybrid" type of annuity that earns interest on your contributions based on a specified equity-based index.
    • During the accumulation period – when you make either a lump sum payment or a series of payments – the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index. (An annuity’s index account does not credit the same return or a percentage of the return of any index. Dow Jones indices do not include the dividend income of the company stocks that comprise it.)
    • The insurance company typically guarantees a minimum return. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive a lump sum. Depending on the mix of features, an equity-indexed annuity may or may not be a security. The typical equity-indexed annuity is not registered with the SEC.

Before You Decide:

If you are considering purchasing an annuity call us to discuss the following:

  • The rating of the insurance company (indicating their financial strength) issuing the annuity, particularly in the case of a fixed annuity.
  • Understand the fees you will pay.
  • Understand that if you are considering a withdrawal from an annuity it may be subject to taxes and a 10% federal penalty if taken prior to 59 1/2 years of age.
  • If it's a qualified annuity, at age 72, you have to begin taking your RMDs (required minimum distributions). And that's added to your income and you have to pay tax on it. 

For additional information about annuities you can visit www.sec.gov/answers/annuity.htm  (If you cannot access this information online, contact us to request a copy.)

* Annuity guarantees rely on the financial stability and claims paying ability of the issuing insurance company.

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