Annuities

What is an Annuity?

An annuity is a series of income payments made at regular intervals by an insurance company, under which you make a lump-sum payment or series of payments called premiums. In return, the company agrees to make periodic payments to you beginning immediately or at some future date. If the payments are delayed to the future, you have a deferred annuity. If the payments start immediately, you have an immediate annuity. Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a guaranteed minimum amount, such as your total purchase payments.

Annuities come in two types: fixed and variable. With a fixed annuity, the insurance company guarantees both the rate of return during the time your account is growing and the payout, or periodic payments amount per dollar in your account. A variable annuity's rate of return is not stable, but varies with the stock, bond, and money market funds that you choose as investment options.

The most frequent use of income payments from an annuity is for retirement, and is usually not used for short-term purposes.

Variable annuities are securities regulated by the SEC. Fixed annuities are not securities and are not regulated by the SEC. Equity-indexed annuities combine features of traditional insurance products (guaranteed minimum return) and traditional securities (return linked to equity markets). 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.

Contact your financial representative for a prospectus and an explanation of the features and risks of fixed and variable annuities to determine if an annuity may be suitable for you. You should read and consider the prospectus carefully before investing which contains important information about the annuity contract, including investment objectives, risks, fees and charges, investment options, death benefits, and payout options.

For additional information about variable annuities see the Securities and Exchange Commission web site at www.sec.gov/investor/pubs/varannty.htm.

Fixed Annuities

A fixed income annuity is fairly good financial instrument for those looking to receive a fixed investment income. Fixed annuities are insurance contracts that provide an annuitant a set amount of income, or fixed dollar payments, paid at regular intervals until a period has ended or event has transpired. An annuitant is the person who owns the annuity. The insurance company guarantees both earnings and principal and the insurer, not the insured, takes the investment risk.

There are many types and multiple options that, for a fee, can be added to a basic fixed annuity. The two main types of fixed annuities are life annuities and term certain annuities. Life annuities pay a predetermined amount each period until the death of the annuitant, and term certain annuities pay a predetermined amount each period (usually monthly) until the annuity product expires, which could be before the death of the annuitant.

Fixed annuities are a powerful vehicle for saving for retirement and guaranteeing regular streams of income upon retirement. Growth of the money invested is tax deferred, can be purchased with pretax income to be tax deferred or may be purchased with money that has already been taxed.

Fixed Annuity contracts are complicated, and those who don't understand them may end up paying a great deal of money for an instrument that doesn't serve its intended purpose. To reap the benefits of reduced taxes, stabilized returns, investors need to thoroughly research and consider these instruments in light of other retirement income.

Variable Annuities

A variable annuity is a life insurance annuity contract which provides future payments to the holder (the annuitant), usually at retirement. This professionally managed portfolio generally invests in equity securities and its performance determines the amount of this total payment. You can purchase a variable annuity with either after tax dollars (non-qualified) or pre-tax dollars (qualified). With non qualified variable annuities you only pay taxes on earnings and there are no government –imposed limits to the amount of money you can contribute. Qualified variable annuities are subject to IRS contribution limits and you will owe taxes on both the amount you invested pre-tax and the earnings.

Consider a variable annuity if you are looking for:

Long term investment.
Tax deferral benefits. No taxes on earnings until funds are actually withdrawn.
Lifetime income payments with flexible payout options
Beneficiary protection

You should carefully consider a variable annuity’s risks, charges, limitations and expenses, as well as the risks, charges, expenses and investment objectives of the underlying investment options. Read the prospectus carefully before investing.

The value of the variable investment options will fluctuate and when redeemed, may be worth more or less than the original cost. Withdrawals and other distribution of taxable amounts, including death benefit payments, will be subject to ordinary income tax. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.

Equity Indexed Annuities

An equity-indexed annuity is a fixed annuity, either immediate or deferred, in which returns are based upon the performance of a specified equity market index, such as the S&P 500, DJIA, or NASDAQ. The principal investment is protected from losses in the equity market, while gains add to the annuity's returns. When you buy an equity-indexed annuity you own an insurance contract and are not buying shares of any stock of an index. The value of any index varies from day to day and is not predictable.

EIA's have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity. So EIA's give you more risk (but more potential return) than a fixed annuity but less risk (and less potential return) than a variable annuity.

Insurance companies commonly offer a provision of a guaranteed minimum return allowing the annuitant a limited downside risk of loss. However, caps on the maximum amount of interest earned and fee-related deductions can result in lower than expected yields. EIA index-linked interest rates computed depend on the particular combination of indexing features that an EIA uses. To fully understand an EIA, make sure you not only understand each feature, but also how the features work together since these features can dramatically impact the return on your investment.

It is possible to lose money in an Equity Indexed Annuity and many insurance companies only guarantee a certain percentage of the premiums you paid plus interest. If the index linked to your annuity declines, you could lose money on your investment. Before you buy an EIA, you should understand the various features of this investment and be prepared to ask your insurance agent, broker, financial planner, or other financial professional many questions about whether an EIA is right for you.