Annuities

A Contract Providing Income You Can’t Outlive

What is an Annuity

First and foremost, an annuity is a contract between an annuity owner and an insurance company. Unlike an investment into stock, bond or a mutual fund, an annuity has various performance guarantees that are designed to decrease an annuity owners’ risk and enhance their overall financial position. Depending on the type of annuity contract owned, these performance guarantees include guaranteed death benefits, income amounts (including lifetime), protection of principal, guaranteed growth and insurance protection against other risks such as long-term care.

How do annuities work?

It really depends on the annuity. Some are designed to help you accumulate savings for long-term goals like retirement. Other annuities focus on providing a guaranteed income stream that begins either right away or at some point in the future. Some annuities can be “cashed in” with the proceeds available for use anyway the owner would like while others can only provide an income that is guaranteed to last for no less time than the contract states.

To understand if an annuity is a financial instrument you should own, you must work with a competent advisor who can compare alternative choices you have to position your money to most efficiently accomplish your goals.

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Do you want an annuity?

People want annuities when they understand how the contract is able to help them have the life they want more efficiently than their other alternatives. Maybe they are worried about outliving their money or worried about investment losses and eroding the value of their nest egg. By utilizing the contractual guaranteed annuities provide, an annuity owner can accomplish more with the wealth that they have and have peace of mind knowing they have the financial strength of a multi-billion-dollar insurance company backing them up.

Types of Annuities in the market

An “Annuity” is a generalized word used to describe different types of annuity contracts in the market. Each type of annuity contract is different

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Annuity Income Options

Annuities are contracts that provide guaranteed income to its owner. The amount of income is based on the payout option that is selected when the income begins. These choices are:

Life-only – The option that provides the highest amount of income to a contract owner. When selected, the contract will provide guaranteed income for the life of the annuitant. (Note: a contract owner and annuitant can be different persons.) When the annuitant dies, the income stops and there are no further payments made to anyone. If the annuitant dies before the premium balance is received, the balance is forfeited to the insurance company who uses it to provide payments to other annuitants who live beyond the point where the income they received equals their annuity premium.

Installment Refund Option – Provided a guaranteed income for the life of the annuitant. If the annuitant dies before the total premium is paid, the income will continue to be paid to the contracts beneficiaries until they equal that amount. This “life insurance” benefit reduces the amount paid to the annuitant while they are alive.

Cash Refund Option – Provides a guaranteed income for the life of the annuitant. If the annuitant dies before the total amount of their premium is paid, a lump-sum payment of the balance is paid to the contract’s beneficiary.

Life with Period Certain Option – provides a payout designed to pay the contract owner a guaranteed income for life but also guarantees the payments will last no less than the time specified on the contract. For example, a 10-year period certain annuity would pay the contracts beneficiary for 5-years is the annuitant passed away after 5-years of receiving their first benefit payment. If the annuitant lived 12-years, the beneficiaries would not receive any additional payments even if the principal balance has not been paid out.

Joint with Survivorship – Pays a benefit for the life of two individuals. Once both individuals die, no further payments are made to anyone.

Taking income from an annuity without annuitizing the contract

A contract owner can withdraw money from an annuity contract in order to take income without having to choose an annuitization option. When money is withdrawn from an annuity, the taxation of the money received from those distributions are first considered income in as much as what had been earned in the contract and secondly as withdrawal of principal.  In the early years of a deferred annuity contract, there are surrender charges to consider as well. Deferred annuity contracts allow the contract owner to withdrawal all interest earned plus 10% of the principal each year without being accessed a surrender charge penalty.