ANNUITIES

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 duration.

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?

Flexibility

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 their savings.

 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 annuity. 

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.