What is an Annuity and why should you care?

by Marc Haberman, LUTCF

With everyone concerned about rising taxes, falling investments, and retirement not as far off for many of us, this is a question we have been asked quite often in recent months by both Human Resources Managers and individuals.

An annuity is a long-term savings plan that can be used to accumulate assets on a tax-deferred basis for retirement and/or to convert retirement assets into a stream of income.

If you (or your employees) are already contributing the maximum to an IRA, your 401(k), or any employer-sponsored retirement plan and need to save more for retirement, a deferred annuity may be the answer to your retirement savings need.

On the other hand, if you’re near or at retirement, an immediate income annuity can be used to convert existing retirement assets into a lifetime income.

Depending on the investment objectives and risk tolerance, there are a variety of ways that one can choose to invest their annuity premiums:

1. Fixed Interest Annuities A fixed interest annuity pays a fixed rate of interest on the premiums invested in the contract, less any applicable charges. The insurance company guarantees* it will pay a minimum interest rate for the life of the annuity contract. The company may also pay an “excess” or bonus interest rate, which is guaranteed for a shorter period, such as one year.
2. Variable AnnuitiesDuring the accumulation phase of a variable annuity, premiums less any applicable charges are placed in a separate account of the insurance company, where the annuity owner can invest in one or more stock and bond subaccounts. During the income phase, the amount of each income payment may be fixed and guaranteed*, or it may be variable, changing with the value of the investments in the separate account.
3. Indexed AnnuitiesAn indexed annuity has characteristics of both a fixed interest annuity and a variable annuity. Similar to a variable annuity, the insurance company pays a rate of return tied to a stock market index, such as Standard and Poor’s 500 Composite Stock Price Index. Similar to fixed interest annuities, indexed annuities also provide a minimum guaranteed* interest rate, meaning that they have less market risk than variable annuities. Index annuities have the potential to earn returns better than fixed interest annuities when the stock market is rising.

When you are ready to begin receiving income from an annuity, you can select from a variety of options, including:

1. Lump Sum DistributionYou can surrender your annuity and receive the entire value in a lump sum payment.
2. Systematic WithdrawalsYou can set up a withdrawal plan, through which you receive a specified amount of money at regular intervals, until all assets have been withdrawn. With this option, you have the flexibility to change the payment schedule in the future.
3. AnnuitizationYou convert the value of your annuity into a lifetime stream of income. There are a variety of options from which to select.
4. Guaranteed Withdrawal BenefitsFor a small additional fee, many variable annuities offer an option to receive guaranteed* income for life without giving up control of your retirement assets. You retain control and have access to your money when you need it.*All guarantees are based on the claims-paying ability of the issuing insurance company.

For more information about annuities, or to determine if an annuity might be appropriate in your particular situation, please contact Marc.