A comprehensive and informative guide to better understanding annuities.
What is an annuity?
Annuity Sales Top $220B in 2013: For the full year, industry-wide sales increased
4.2 percent to $220.9 billion from $212 billion during the previous year,
according to data reported by Morningstar, Inc. and Beacon Research.
Let’s assume that you don’t know what an annuity is. No problem! Almost everyone knows what life insurance is, so let’s start by drawing a comparison.
• Life insurance protects against the risk of death, or dying too soon; if the insured person(s) die, the insurance company pays out a sum of money to one or more designated beneficiaries.
• An annuity is sometimes referred to as “the opposite of life insurance.” Annuities insure against the risk of life, or living too long; the insured person receives a stream of income from the insurance company that he or she cannot outlive.
• With an annuity, the purchaser pays a premium to the insurance company. In exchange, he or she receives a regular stream of income payments from the insurer that begin either immediately or at some time in the future. The payment stream continues until the purchaser dies - even if that occurs at age 127½!
• An annuity is one of many financial products that are available as a retirement income vehicle. You should work with a trustworthy professional when determining which of these vehicles best suits your needs and retirement goals.
Before making this decision, you should also consider a fundamental principle of risk:
Risk/Reward Tradeoff - A direct inverse relationship between possible risk and possible reward, which holds for a particular situation. To realize greater reward, one must generally accept a greater risk, and vice versa.
Scroll further down the page for more information on all types of annuities.
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Ask Yourself the Big Three.
In light of this tradeoff, there are many questions to ask. But let’s begin with 3 questions
that must be answered when researching what type of annuity might be right for you.
1. What level of risk am I willing to assume
with the annuity?
• If interested in high minimum guaranteed interest, regardless of the lower level of interest crediting/gains, consider a Fixed Annuity.
• If willing to accept a lower minimum guarantee than a fixed annuity, but looking for potentially greater interest crediting/gains, consider a Fixed Indexed Annuity.
• If willing to accept no minimum guaranteed interest, and the possibility of unlimited loss in exchange for the possibility of unlimited interest crediting/gains, consider a Variable Annuity.
2. How soon will I need the regular stream
of income payments from the annuity?
• If income will be taken within the first year, consider an immediate annuity (offered in Fixed, Fixed Indexed, and Variable types).
• If income will be taken at some time further in the future, consider a deferred annuity (offered in Fixed, Fixed Indexed, and Variable types).
3. How many premium payments will I be
making into the annuity?
• If only a single payment will be made into the annuity, consider a single premium immediate annuity or a single premium deferred annuity.
• If making more than one payment to the annuity, consider a flexible premium deferred annuity. There are also two different classifications of annuities: deferred and immediate.
Different types of annuities
Fixed Indexed Annuities credit interest typically based on the performance
of stock market or bond indexes. They provide limited gain potential and
are not intended to perform comparably to securities products.
What is a deferred annuity?
An insurance product whereby at least a year will elapse between when the lump sum or series of premium(s) are paid and when the annuity is transitioned into a stream of income through annuitization. Deferred annuities can be Fixed, Fixed Indexed, or Variable in nature.
What is an immediate annuity?
An insurance product whereby a lump sum premium is paid and the annuity is transitioned into a stream of income through annuitization within one year from the date of purchase. Immediate annuities can be Fixed, Indexed, or Variable in nature.
Deferred annuities typically are used as vehicles for accumulation, or building additional interest until the annuitant is ready to transition the annuity to a series of payments through a process called “annuitization.” Alternatively, an immediate annuity is often used as a vehicle for individuals who are ready for their income stream to begin, well, immediately.
Both deferred and immediate annuities can have their interest credited in several different ways. The two basic types of deferred and immediate annuities are Fixed and Variable. Of the Fixed variety, there are (traditional) Fixed as well as Fixed Indexed.
Scroll further down the page for more information on all types of annuities.
Annuity Risk Spectrum
Indexed Annuities provide limited gain potential and are not intended to perform
comparably to securities products. Fixed Indexed Annuities merely credit interest
typically based on the performance of the stock market, commodities, or the bond index.
WARNING: if a salesperson suggests that Indexed Annuities provide unlimited gain
potential, RUN! This individual either misunderstands or is misrepresenting the product.
of premium at
capped at less
Gains based on
directly on fund
Don’t be confused; these annuities do not allow you to invest directly in the stock market. They do, however, provide principal guarantee regardless of market performance, the opportunity to outpace fixed money instruments such as Certificates of Deposit (CDs) or Fixed Annuities. In addition, many Fixed Indexed Annuities can provide policy holders with a guaranteed income* stream regardless of how long you live with the purchase of your tax-deferred annuity. You can convert your annuity into payments based on your needs, whether that be payments for life or a specified period. Should you consider investing in an annuity? If so, what type? Fixed annuity, variable annuity, fixed indexed annuity? One of the keys to annuities is to invest in the ones that work the best for you and your family. The problem is that there are so many to choose from, and annuity plans can be confusing. In order to make sure you have the best choices for what you want to accomplish, I highly recommend talking to a professional who deals with these types of investments on a daily basis. We work with over 30 insurance carriers that provide many different types of annuities to help our clients reach their goals.
Income rider guarantees based on claim-paying ability of insurer.
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President and Principal of Wealth Preservation Group, Inc. a Colorado Corporation since 1999, John holds NASD Series 65 and Texas and Colorado Insurance licenses for life, health and long-term care so that he can offer financial services and advice to clients that may help to preserve their assets, increase their income and reduce their taxes. John will provide comprehensive financial planning, including retirement planning and portfolio management. With extensive, timely and unparalleled financial solutions, John is committed to offering a one-source solution for management, growth and preservation of his clients' wealth.
As an independent Investment Advisor Representative, John provides personal financial advice that is free of a preconceived solution and that is suited to his clients' needs. Having worked with attorneys in Texas and Colorado, John has a working knowledge of the importance of a complete estate plan, including the proper implementation and execution of planning documents. With clients across Colorado and Texas and a few more in Nebraska, New Mexico, Michigan, Oklahoma, Utah and California; John is proud of his company's Better Business Bureau's Gold Star Rating for excellence in customer service.
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Keeping your finances afloat
An introduction to better understanding annuities