Annuity (defined): a stipulated sum payable at
certain regular intervals during the lifetime of one or more persons or payable for a
specific period. Simply speaking, an annuity is a contract between you and an
insurance company, under which you agree to pay premiums in exchange for the company's
return promise to pay a specified amount of money at periodic intervals for a specific
Regardless of whether your retired or still working, having a consistent income
is a top priority. Annuities are a savings vehicle designed to provide a consistent
stream of income for a specific period of time. Annuities can be used to help save
for retirement needs, or help distribute an income after retirement.
Fixed annuities can be deferred or immediate. With a deferred annuity, you simply contribute a
sum of money either all at once or periodically, and defer payout until a future
date. With an immediate annuity, you contribute a lump sum of money, and in return
you receive immediate income payouts based on the structure of your annuity contract.
A FEW TYPES OF ANNUITIES
Single Premium Deferred Annuity (SPDA):
With an SPDA, you contribute a lump sum of money into an annuity policy, and
defer an income payout until a later date (usually after age 59 1/2.)
Flexible Premium Deferred Annuity (FPDA):
With an FPDA, you make flexible payments into the annuity contract and defer
taking an income from what you have contributed until a future date (usually age 59 1/2).
Single Premium Immediate Annuity (SPIA):
With an SPIA, you contribute a lump sum of money into the annuity, and start to
receive an immediate income for a specified period of time.
WHY PURCHASE AN ANNUITY?
Annuities are very flexible savings vehicles, allowing you to choose how money
goes in and how money come out. Upon withdrawing your funds, you can specify to the
insurance company how withdrawals are to be made.
Annuities are a great vehicle to protect seniors from outliving
Annuities allow you flexibility as to how income is paid out. A
popular option is to take a "Life with period certain" distribution, which
guarantees an income will be paid out for the life of the annuitant, regardless of total
payout, and guarantees that a specific number of payments will be made regardless of the
years the annuitant lives.
Annuities provide guaranteed interest and payouts, further
securing post retirement needs.
Most annuities guarantee* a minimum interest rate that will be credited to the
annuity cash value. The guarantee rate is typically 3% to 4.5% when the
contract is annuitized. *Guarantees are based on the credit worthiness of the issue of the
Annuities are tax-deferred.
The money you contribute into your annuity earns tax deferred interest (varies
depending on annuity contract).*
Annuities can be tax-deductible if used as a tax-qualified
retirement vehicle such as an individual retirement annuity.
OTHER POINTS TO CONSIDER
1. Annuities vary from insurance
company to insurance company. The initial interest rate quoted on an annuity is only
one of the factors that should be taken into consideration. A good annuity not only
has a competitive interest rate in the first year, but follows up with good interest rates
in future years. Analyze the interest rate experience of the company. Many
annuities pay out bonus interest rates in the first year, but drop the interest rates
significantly below market rate into the following years. Ultimately these annuities
are less attractive than they may initially appear.
2. Consider the financial strength of
the insurance company. Your money will be invested with this company, so it is
important to be comfortable with the company.
3. Make sure the annuity you are buying
serves the right need. If you need immediate income, than a deferred annuity would
not be the right choice. Make sure the annuity contract has enough payout
flexibility to fit your individual needs.
4. Ask for the guarantees on the
policy. Since most annuity contracts are designed to protect post retirement income,
it is extremely important that the funds have strong guarantees.
5. There are many different types of
annuities and interest creding methods. Be sure that you understand the different
annuities and their methods for crediting interest.