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Annuities have been in existence for well over two hundred years. The very first mention of Annuities in the United States was the use of these products by the Presbyterian Church in 1740 to provide security for the clergy and widows. Annuities allow you to accumulate tax-deferred funds for retirement and then, if you desire, receive a guaranteed income (this process is called Annuitization) payable for life or for a specified period of time: generally a term of five or ten years.

Annuities are offered by Insurance companies and sold through licensed agents. The insurance company must be evaluated and licensed in your state as does the agent. State insurance commissions scrutinize Insurance companies to ensure they have reserve funds, commonly referred to as State Legal Reserve Pools, in place to protect investors before granting insurance companies licenses. If an insurance company goes out of business other insurance companies licensed in state must assume bankrupt insurers obligations and liabilities. Note that this protection protects fixed-rate annuity holders only, with some protection afforded to variable annuity owners.

Annuities are very similar to CDs offered by banks. Just like banks insurance companies offer different rates and returns on annuity investments.

Advantages of Annuities:

All annuities have three primary advantages: Tax Deferral, Avoidance of Probate, and a Guaranteed Income (optional) for a fixed period of time, or income for life. Please note that guaranteed returns may be capped and that there is early withdrawal penalties associated with most annuities.

More specific reasons to invest in fixed and immediate annuities:

  • You need to safely create wealth for your heirs
  • You need tax-deferred growth
  • You need your principal and interest guaranteed
  • You need your heirs to avoid probate upon your death
  • You need an increased death benefit
  • You need stock-market linked gains without the downside risk
  • You have money that is designated for inheritance
  • You do not need more than 10% liquidity annually

Safe Annuities

There are many types of annuities in the market today. However, we only recommend our clients use annuities that guarantee no loss of principal. Here is a listing of some safe annuities on their descriptions:

Fixed Annuity

For retirees, the most attractive feature of fixed annuities is the assurance that it will provide a fixed income for life. The three important features of an annuity are tax-deferred accumulation, guarantee of principal, and guaranteed life income. The tax-deferred accumulation – in comparison to a similar taxable investment - allows for greater accumulation since earnings are not taxed away annually.

Annuities have been conservative vehicles for investment. Of course you should always check out the strength of any insurance company you’re considering buying from. A good source is to get the Comdex rating of 80 or better from Vital Signs (see a financial professional) or a Weiss rating of B or better.

With the guaranteed life income payout option, you don’t have to worry about market downturns that could rob you of income. Also if you can put off your payout until later, you’re monthly payout will increase not only from increased earnings but from your reduced life expectancy.

Tax Deferred Earnings
Assurance of Lifetime Income
Not Subject to Market Downturns

Equity Indexed Annuities

An equity-indexed annuity is a special type of contract between you and an insurance company. 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. The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum.

Your Money Is Safe
Your tax-deferred annuity is safe. A qualified legal reserve* life insurance company is required to meet its contractual obligations to you. These reserves must, at all times, be equal to the withdrawal value of your annuity policy. In addition to reserves, state law also requires certain levels of capital and surplus to further increase policyholder protection. Plus, each state has their own Life & Health Guaranty Association, which protects individuals from losses.

*Legal reserve refers to the strict financial requirements that must be met by an insurance company to protect the money paid in by all policyholders.

Annuities Are Tax Advantaged
With a Deferred Annuity you pay NO taxes on your interest, until you actually use it. You can also control the tax year, in which the withdrawals are made, and then you only pay taxes on the interest you withdraw.

Annuities Avoid Probate
After you die, the accumulated funds within your annuity will be transferred to your named beneficiaries, avoiding the expense, delay, frustration and publicity of the probate process.

Annuities Are Not Attachable By Creditors
In most states deferred annuities are protected from all creditors, even in bankruptcy. That’s real safety!

Annuities Are Incontestable
Heirs, family members and creditors can and do contest Wills, Trusts and the distribution of other assets going through probate, slowing up the process and adding additional expenses.

Annuities Are Private
Unlike Trusts, Wills and the probate process, which are a matter of public record, you can leave assets to a friend, a favorite relative or a charity, without upsetting the remaining heirs.

Annuities Provide Immediate Cash Resources
Your family has the money they need to live on, while they are waiting for distribution of other assets.

Annuities Provide Control From The Grave
You can specify whether your heirs receive a lump sum payment, or a guaranteed monthly income.

Annuities Can Provide A Guaranteed Income For The Rest Of Your Life.


Annuities With Risk

Variable Annuities

First, our office does not endorse purchasing a variable annuity. Here is why:

A variable annuity is a contract between you and an issuer whereby you agree to give the issuer principal and in return the issuer guarantees you variable payments over time. While annuities are not insurance policies, they are issued by insurance companies.

Variable annuities enable you to invest in a selection of funds, called sub-accounts. These sub-accounts are tied to market performance, and often have a corresponding managed investment after which they are modeled, such as a mutual fund. Available choices range from the most conservative, such as money market, guaranteed fixed accounts, and government bond funds, to more aggressive such as growth, small cap, mid cap, large cap, capital appreciation, aggressive growth, and emerging markets funds. Some have as many as forty or more fund choices with ten or more managers, and allow you to switch between them at no cost and without taxes (although excessive changes to your contract could result in the imposition of a small fee, so be sure to consult your financial planner or prospectus if you are making regular changes).

Variable annuities are different than their fixed annuity cousins, which are invested primarily in government securities and high-grade corporate bonds, and offer exclusively a guaranteed rate, typically over a period of one to ten years and are safe investments.

Source: Ty J. Young & Associates and www.annuity.com/annuity_answers.cfm (same article on both sites).

 

 

 

 

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