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Annuities for Retirement

  • WHAT IS AN ANNITY
  • IMMIEDIATE ANNUITIES
  • FIXED-INDEXED ANNUITY
  • BONUS ANNUITIES
  • VARIABLE ANNUITIES
  • DEFFERED ANNUITY
  • HYBRID ANNUITIES
  • DEFERRED INCOME/LONGEVITY ANNUITIES
  • QUALIFIED LONGEVITY ANNUITY-QLAC

The key components when discussing RETIREMENT strategies such as ANNUITIES with our clients are: safety, protection of principal, avoid market risk, low to no fees, income generation, tax deferred growth, inflation, and taxes. When adding lifetime income riders and bonus offerings that provide income benefits for life and additional income in case of medical confinement you can have a much wiser investment. Having part or some of your assets in a place that provide lifetime income without the risk of market volatility is fundamental. These are some of the essential features of indexed annuities and why having the option to include them as part of your financial picture is so important.

The number one fear people have today, upon retirement is not death, it is running out of money! With an indexed annuity, addressing risk, protecting principal, providing lifetime income for you and your wife is our number one priority. When we shop around for best options we analyze market risk, principal protection, longevity, taxes, inflation and income for life are part of our strategy.

Fully understanding the ins and outs of indexed annuities, along with product variations and the many different options available, may require some additional expertise. We’re here to help you make informed decisions! We have included a list of the most popular annuities in the market today. Feel free to call Maria Gutierrez today at 954-394-8672 or by email at  to run a quote and illustration for your evaluation. We are contracted with the best rated annuity carrier in the world!

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WHAT IS AN ANNITY

An annuity is an insurance product that pays out income, and can be used as part of a retirement strategy. Annuities are a popular choice for investors who want to receive a steady income stream in retirement. Here's how an annuity works: you make an investment in the annuity, and it then makes payments to you on a future date or series of dates. The income you receive from an annuity can be paid out monthly, quarterly, annually or even in a lump sum payment.  Which is best for you depends on several variables, including your risk orientation, income goals, and when you want to begin receiving annuity income.

You can opt to receive payments for the rest of your life, or for a set number of years. How much you receive depends on whether you opt for a guaranteed payout (Fixed annuity) or a payout stream determined by the performance of your annuity's underlying investments (Variable Annuity).

IMMEDIATE ANNUITIES

An immediate annuity, also called an income annuity or “Single premium immediate annuity (SPIA)” is a type of annuity designed to provide guaranteed income payments that must begin between one month and one year after purchase. The purchase of an immediate annuity is usually an irrevocable decision that cannot be undone once the free-look period has expired following contract issue. Immediate annuities are considered by many to be the original and oldest form of annuity contract on the planet, with the earliest recorded uses dating back thousands of years. They are also straightforward and efficient in delivering their benefits.

The buyer of an immediate annuity makes a lump sum payment to an insurance company in exchange for that company’s contractual obligation and guarantee to make income payments for the term specified in the annuity contract, creating a type of personal pension.  One of the many advantages of immediate annuities is that the payment term can be customized in numerous ways to fit the individual needs of the buyer. Some of the payment term options available include: Single Life Annuities, Joint Life Annuities, and Period Certain Only Annuities.

Source of Funds: Qualified vs. Non-Qualified: Qualified funds are those contained within a tax qualified account, such as an IRA. Non-qualified funds encompass everything else, except those funds held within a tax qualified account. When an immediate annuity is purchased with qualified funds, the entire payment received each month from the qualified annuity is fully taxable as income, because taxes have never been paid on those funds. However, when an immediate annuity is purchased with non-qualified funds, a portion of each monthly income payment is considered a return of previously taxed principal (cost basis) and therefore excluded from taxation.

FIXED-INDEXED ANNUITY

Fixed indexed annuities, formerly called equity indexed annuities, are a type of Deferred Annuity that credits interest based on the changes to a market index, such as the S&P 500 or Dow Jones Industrial Average. Interest is credited when the index value increases, but the interest rate is guaranteed never to be less than zero, even if the market goes down. Your principal, as well as all previously credited interest earnings, can never be lost and are always protected from any unforeseen downturn in the market.

Insurance companies use a variety of formulas, depending on the design of a particular annuity, to determine how a change in the index correlates to the amount of interest that will be credited at the end of each index term (most commonly on an annual basis). The formula used usually consists of two parts: The crediting method and a limiting factor.

The most frequently used crediting methods are: Annual Point-to-Point – Measures the percentage change in the underlying index value between two dates, at the beginning and the end of the annuity contract year. Multi-Year Point-to-Point – Measures the percentage change in the underlying index value between two dates that are more than one year apart. Monthly Point-to-Point – Measures the percentage change in the underlying index value each month. Usually, each monthly change is limited by a cap for positive changes, but not for negative changes. At the end of each index term, all of the recorded monthly percentage changes (both positive and negative) are added together. Monthly Averaging – Calculated by comparing the underlying index value on the first day of the index term to the monthly average of that same index at the end of the index term. The monthly average index value equals the sum of the monthly index values recorded each month over the course of the preceding index term, divided by the number of months in that term. At the end of each index term, the ending monthly average index value is compared with the starting index value of that term. Daily Averaging – Calculated by comparing the underlying index value on the first day of the index term to the daily average (usually 252 trading days) of that same index at the end of the index term. The daily average index value equals the sum of the daily index values recorded each trading day over the course of the preceding index term, divided by the number of trading days in that term. At the end of each index term, the ending daily average index value is compared with the starting index value of that term.

The most common Limiting Factors are: All fixed indexed annuities interest crediting formulas have some type of limiting factor that is applied to cause interest earnings to be based on only a portion of the change in the market index over the index term. In other words, in exchange for the added guarantees and principal protection, you will not receive 100% of the index market gains. Cap Rate – An upper limit on the index-linked interest rate that is applied to the annuity. The cap rate is the maximum rate of interest the annuity can earn during the index term. Participation Rate – Determines what percentage of the increase in the underlying market index will be used to calculate the index-linked interest credits during the index term. Spread Rate or Margin – A specified percentage that is deducted from the total calculated change in the underlying index value to determine the net amount of index-linked interest that is credited to the annuity.

BONUS ANNUITIES

A Bonus Annuity is a type of annuity product that offers either an upfront premium bonus or a first year interest rate bonus. When available, upfront premium bonuses are typically found with fixed indexed annuity products, while first year interest rate bonuses are usually attached to traditional fixed annuities.

Upfront Premium Bonus – A lump sum amount that the insurance company credits to your account based upon a percentage of the premium deposit you initially make when purchasing the annuity, or when you add additional funds. For example, if you initially place $100,000 into an annuity product that offers a 5% upfront premium bonus, the insurance company would immediately add an extra $5,000 to your annuity, making the value of your account $105,000 on the issue date of your policy.

First Year Interest Rate Bonus – Usually, a set percentage of additional interest that is added to the base interest rate of an annuity contract and applied during the first year. In the second and subsequent years, the interest crediting rate is reduced to the normal non-bonus base rate which is declared each year by the insurance company, subject to a contractually guaranteed minimum. For example, if you purchased an annuity that had a base interest rate of 2% with a bonus rate of 6%, you would earn a total of 8% interest, over the course of the first contract year, on your premium deposit.

VARIABLE ANNUITIES

A variable annuity is a contract where all of the premium deposits are invested in variable subaccounts subject to market fluctuations, as opposed to a principal protected fixed interest annuity. The available subaccount options function very similar to an assortment of mutual funds that the investor can choose from, but they also have an insurance component, sometimes called an annuity wrapper.

The reasons why a person would choose to purchase a variable annuity rather than mutual funds directly usually include the tax benefits and contract features provided by the annuity wrapper. Just like all annuity products, non-qualified variable annuities provide the opportunity for tax-deferred growth when funds are left to grow and compound inside the contract. Additionally, many variable annuities offer optional riders, for an added cost, that provide living benefits that may be helpful when preparing a retirement income strategy.

However, it is an unfortunate fact that many variable annuity riders are sold in such a way as to imply that the rider will protect investors from loss, and that with the addition of these riders their funds will be, magically somehow, insulated from market risk. THIS IS SIMPLY NOT TRUE. No matter what a variable annuity agents tells you, when you purchase a variable annuity,YOUR FUNDS ARE SUBJECT TO MARKET RISK, which sometimes may include significant losses.

The value of a variable annuity contract is based upon the performance of the investment subaccounts that you select. These subaccounts fluctuate in value with market conditions and the principal may be worth more or less than the original cost when you decide to surrender the policy. With variable annuities, the individual annuity owner bears ALL of the investment risk. As a general rule, seniors and retirees should be reducing their investment risk as they grow older. By contrast, with fixed annuities, the issuing insurance company assumes all of the risk and contractually guarantees the investor’s principal as well as a reasonable interest rate as defined in the contract.

Other Concerns with Variable Annuities: Fees, Fees and More Fees – One of the big drawbacks of variable annuities are the amount of fees that get charged against the investor’s account. There are investment management fees that typically range between 1.00% and 3.00%. There are mortality and expense risk charges, which according to Morningstar, average 1.35%, as well as administrative charges that usually run somewhere between 0.10% and 0.50% per year. Not to mention the additional charges incurred if optional riders are added. Putting this into perspective, if you owned a $100,000 variable annuity, and your fees totaled 3.70%, your account would be charged $3,700 every year. These fees come right off the top and are incurred even in down years, when the value of your principal is declining.

Variable annuities are sold by prospectus. A prospectus is a legal document, required by the Securities and Exchange Commission, which provides details about a variable annuity that is being offered for sale to the public. The problem is that a variable annuity prospectus can be extremely long; also, for the average investor, or even an investment representative for that matter, they are very complicated and difficult to understand. As  an independent agent, Maria Gutierrez Insurance only offers principal protected, guaranteed and insured FIXED ANNUITY products. Consequently, the material presented in this article regarding variable annuities is for informational purposes only. We are focused on educating and informing consumers regarding their annuity purchase options and assisting them in acquiring the most appropriate fixed annuities for their individual needs. We are NOT directly involved in the securities industry, nor do we market or sell variable annuities.

 

DEFFERED ANNUITY

In a deferred annuity your money is invested for a period of time until you are ready to begin taking withdrawals, typically in retirement. The Deferred Annuity accumulates money while the Immediate Annuity pays out. Deferred annuities can also be converted into immediate annuities when the owner wants to start collecting payments.

A deferred annuity would better be defined as a category of annuities rather than a type of annuity. All annuities can be categorized as either deferred or immediate. When income payments are scheduled to begin is the determining factor as to which category an annuity belongs. There are many different types of annuities that fall underneath the broader deferred annuity category.

A deferred annuity has two phases: the accumulation phase, where you let your money grow for a period of time, and the payout phase. During accumulation, your money grows tax-deferred until you withdraw it, either as a lump sum or as a series of payments. You decide when to take income from your annuity and therefore, when to pay any taxes owed. Gaining increased control over your taxes is one of the key benefits of deferred annuities. The longer you can defer paying income tax on your compounded interest earnings, the greater your gain will be as compared to the gain you would make with a fully taxable account, such as a bank certificate of deposit (CD) or money market account.

Payout Phase: The payout phase begins when you decide to take income from your annuity. For most people, this is during retirement. As your needs dictate, you can take partial withdrawals, completely cash-out (surrender) your annuity, or convert your deferred annuity into a stream of guaranteed income payments (annuitization). This last option is essentially the same as buying an immediate annuity and will occur automatically on the maturity date of the contract if no action is taken in advance of that date.

Maturity Date: Many people confuse the contracts maturity date with the length of the guarantee period or surrender penalty term. The maturity date is the date specified within the annuity contract at which time the owner must elect a settlement option and begin receiving payments by way of annuitizing the contract. This occurs at a predefined attained age, typically somewhere between the ages of 95 – 115. Whereas the guarantee period or surrender penalty term is the timeframe in which the contract is still subject to penalties for early surrender or withdrawals exceeding the penalty free provisions of the contract, commonly 3 – 10 years from the initial contract issue date.

HYBRID ANNUITIES

Hybrid annuity is used by some annuity marketers to describe a fixed indexed annuity with an attached optional guaranteed lifetime income rider. Technically, there is no such thing as a Hybrid Annuity. It is not a category of products, or standardly defined by any insurance company, but rather, a marketing term used to describe an annuity that supposedly merges the benefits of several types of annuities, and/or their riders, to offer a combination of features resulting in multiple benefits that can be used together to accomplish a long term series of financial objectives.

Some marketing copywriters would have you believe that a hybrid annuity takes the best features of a fixed annuity, a variable annuity and an immediate annuity, blending them together into one magical new product type called a hybrid annuity. The reality is that what the hybrid annuity promoters are most often talking about is a fixed indexed annuity with an attached optional guaranteed lifetime income rider.

What is an Income Rider and How Does it Work? An Income Rider is an optional benefit that can be added to some annuity contracts, usually for a fee, that is designed to help generate a higher level of guaranteed lifetime income at a future date, while still maintaining control over your underlying contract value.

The guaranteed payment amount that you will receive for the remainder of your life is determined by your income account value, gender and age at the time of payout activation. Prior to activating your lifetime income, the income account value typically grows at a guaranteed annual compounded rate of between 4 to 7 percent. It is important to note that the income account value is used only as a calculating factor in determining the amount of your guaranteed income payments. It is not the same thing as your underlying contract value; it has no cash value and cannot be withdrawn.

DEFERRED INCOME/LONGEVITY ANNUITIES

A deferred income annuity (DIA), also called a longevity annuity, is the type of annuity contract that is designed to provide lifetime guaranteed monthly income at a predetermined future target date. Its primary purpose is to protect against outliving one's assets at advanced ages, in the most efficient manner possible. With a deferred income / longevity annuity, you know the exact amount of lifetime income you will receive and the exact date on which you will begin receiving it. Also, payments can be based on either one individual life, or on joint lives (typically a spouse). In exchange for a lump sum payment now, or a series of premium deposits over time, the issuing insurance company guarantees a lifetime income to begin at an age (typically 70-85) defined in advance by the  contract owner. The longer the delay and the more advanced the age before income payments begin, the more significant the payout will be when calculated as a percentage of the initial deposit premium.

One way retirees are using deferred income annuities to secure their financial futures, is to allocate a portion of their investable assets towards the purchase of a DIA to provide adequate lifetime retirement income beginning at age 80 or 85. Then, with the balance of their retirement funds, they only need to create an income plan that gets them through from their current age to age 80 or 85, when the deferred income annuity payments kick-in. This has the benefit of being a defined period of time, rather than the uncertainty of trying to make their funds last for their entire lifetime, which is an unknown period of time.

QUALIFIED LONGEVITY ANNUITY-QLAC

A Qualified Longevity Annuity Contract (QLAC) is a relatively new type of deferred income annuity that was created as a result of a July 1, 2014, U.S. Treasury Department ruling. The 2014 ruling addressed and solved a problem for many qualified account holders, and makes the purchase of Deferred Income Annuities with tax qualified funds from an IRA or 401k account, a much more attractive option.

Prior to the ruling, if you wanted to purchase a  deferred income annuity with tax qualified funds, you were required to start your guaranteed income payments no later than age 70 ½, in order to satisfy IRS mandated “Required Minimum Distribution (RMD) rules” . But now, if your deferred income annuity meets certain requirements, it is considered a Qualified Longevity Annuity Contract, allowing you to defer the start of your income payments to as late as age 85, while at the same time bypassing the normal required minimum distribution rules on the funds allocated to the QLAC.

Qualified Longevity Annuity Contract (QLAC) Requirements:

1) Over your lifetime, you cannot allocate more than 25% of the total of all your IRAs or $130,000, whichever is less, towards the purchase of a QLAC. In future years, the $130,000 limit will be adjusted for inflation.

2) Payments can begin at any age, but must begin no later than age 85. It’s important to note, that the $130,000 / 25% limit is per person. For example, if one spouse had $600,000 in their IRA, they could allocate up to $130,000 (limit) into a QLAC, and if the other spouse had $350,000 in their IRA, they could allocate up to $87,500 (25%) into a QLAC. All dollar amounts allocated to Qualified Longevity Annuity Contracts completely avoid and are not included when calculating future required minimum distributions (RMDs).

TAX BENEFITS OF ANNUITIES

Yes. Money that you invest in an annuity grows tax-deferred. When you eventually make withdrawals, the amount you contributed to the annuity is not taxed, but your earnings are taxed at your regular income tax rate.

ADVANTAGES OF ANNUITIES

The biggest advantages annuities offer is that they allow you to sock away a larger amount of cash and defer paying taxes.

Unlike other tax-deferred retirement accounts such as 401(k)s and IRAs there is no annual contribution limit for an annuity. That allows you to put away more money for retirement, and is particularly useful for those that are closest to retirement age and need to catch up.

All the money you invest compounds year after year without any tax bill from Uncle Sam. That ability to keep every dollar invested working for you can be a big advantage over taxable investments.

When you cash out, you can choose to take a lump-sum payment from your annuity, but many retirees prefer to set up guaranteed payments for a specific length of time or the rest of your life, providing a steady stream of income.

INVESTMENT OPTIONS OF ANNUITIES

If you choose a Fixed Annuity you are not responsible for choosing the investments - the insurance company handles that job and agrees to pay you a pre-determined fixed return.

When you opt for a Variable Annuity you decide how to invest your money in the sub-accounts (essentially mutual funds) offered within the annuity. The value of your account depends on the performance of the funds you choose. While a variable annuity has the benefit of tax-deferred growth, its annual expenses are likely to be much higher than the expenses on regular mutual funds - so ordinary funds may be a better option.

PAYOUT OPTIONS OF ANNUITIES

When you invest in your annuity you also choose how you want your eventual payouts to be calculated. Your options include:

1. Income for guaranteed period: (also called period certain annuity). You are guaranteed a specific payment amount for a set period of time (say, five years or 30 years). If you die before the end of the period your beneficiary will receive the remainder of the payments for the guaranteed period.

2. Lifetime payments: A guaranteed income payout during your lifetime only; there is no survivor benefit. The payouts can be fixed or variable. The amount of the payout is determined by how much you invest and your life expectancy. At the time of death all payments stop - your heirs don't get anything.

3. Income for life with a guaranteed period certain benefit: (also called life with period certain). A combination of a life annuity and a period certain annuity. You receive a guaranteed payout for life that includes a period certain phase. If you die during the period certain phase of the account, your beneficiary will continue to receive the payment for the remainder of the period. For example, life with a 10 year period certain is a common arrangement. If you die five years after you begin collecting, the payments continue to your survivor for five more years.

4. Joint and survivor annuity: Your beneficiary will continue to receive payouts for the rest of his or her life after you die. A popular option for married couples.

WITHDRAWAL POLICIES OF ANNUITIES

Withdrawing money from an annuity can be a costly move, so make sure you review your plan's rules and federal law before you do.

If you make withdrawals before you reach age 59 ½ , you will be required to pay Uncle Sam a 10% early withdrawal penalty as well as regular income tax on your investment earnings. (The amount you contributed to the annuity will not be not taxed.)  If your withdrawals come within the first five to seven years that you own the annuity, you probably will owe the insurance company a surrender charge. The surrender charge is typically 7% or so of your withdrawal amount if you leave after just one year, and the fee then typically declines by one percentage point a year until it gets to zero after year seven or eight.

Some annuities have initial surrender charges, some annuities allow you to withdraw up to 10% of your investment without having to pay the surrender charge.

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