Medicare Part DAnnuities 101

We will answer some of your questions and myths about annuities. Please consult your representative before purchasing an annuity. Remember only certain annuities are protected against the market losses.

 

An annuity is a type of financial insurance contract that can accumulate value and provide a steady stream of income over a long period of time. Annuities are typically used to build retirement savings, although they can also be a tool to save for a child’s education, create a trust fund, or provide for a surviving spouse or heirs. Because annuity earnings may grow tax-deferred, people who are primarily concerned with limiting their taxes also frequently purchase them.

Annuities are not right for everyone. They typically take a number of years to become profitable, so they’re usually not a good financial option for people with a short-term financial goal.

Introduction to Annuities

An annuity is a financial insurance contract that is typically sold by an insurance company, usually through agents who are paid commissions for the sale of the contract. Banks or investment firms backed by insurance companies may also sell annuities.

When you purchase an annuity, you agree to pay a premium in exchange for an annuity contract that will provide payments for a fixed period or for the duration of your life. The insurance company issuing the annuity or the bank or investment firm agrees to pay a minimum guaranteed interest on your premium payments.  In addition, the contract may credit additional interest or a bonus over the minimum guaranteed interest rate.

 

Accumulation Phase and Payout Phase

The life of an annuity contract can be divided into two parts:  the accumulation phase and the payout phase. Your premiums and interest accrue during the accumulation phase to an accumulated value that is paid to you in the payout phase. The accumulated value is the current total of the premiums you have paid into the contract, less any applicable charges, plus any interest or bonus earnings. These earnings vary with market conditions and interest rates.

The payout phase, also referred to as annuitization, is the period during which the annuity contract pays you. The payout can be a partial withdrawal, complete withdrawal, death benefit, or a series of guaranteed payments structured in one of several ways.

Most annuities will allow you to make withdraws of your invested value before the payout phase begins. Some contracts provide a “free” 10 percent annual withdrawal.

If you withdraw money before payout, the annuity may charge you a penalty called a surrender charge. Surrender charges can be particularly high during the first few years of the contract, so you could actually lose money if you withdraw some or all of the accumulated value early. These surrender charges or penalties are the primary reasons an annuity contract is generally more appropriate as a long-term financial option. The penalties may be reduced or eliminated in later years.

Withdrawing the entire accumulated value early effectively cancels the annuity contract.

 

Is an Annuity Right for You?

 

If you are over the age of 59 1/2 and you plan to take a portion of your money over a period of time and you do have additional funds available.

If you do not have any other investments or savings accounts, an annuity is probably not a good place to start. It is generally a good idea for investors to have some investments that can be quickly converted to cash in case of an emergency or sudden need. You may have to pay a surrender charge if you withdraw your money early.

If your financial goal is to generate a guaranteed income stream for retirement, certain types of annuities that make fixed monthly payments for the remainder of your lifetime can be a good option.

If you have the financial discipline to accumulate and maintain your contract for the term, an annuity can be a good option. Cashing in an annuity in the short term can result in surrender charges and could increase your tax obligations.

If you’re currently in a high-income tax bracket, but expect to be in a lower tax bracket in the future, such as in retirement, an annuity can be a good choice because earnings are tax-deferred. This means an annuity’s earnings are’t taxed while they grow, only when you actually make a withdrawal or receive a payment. If you contribute to an annuity while you’re in a high tax bracket and receive payments while you’re in a lower one, you will probably pay less in taxes than you would with other types of financial options.

Planning on passing the money to a beneficiary and would like to do this without consulting an attorney. The annuity will do that for you. At the time you complete your application the representative should put your beneficiaries information on the application. Upon your death, the beneficiaries will simply need to provide a copy of your death certificate along of proof of their selves and the funds will be disbursed as per the contract agreement.

 

Why Brokers do not offer Indexed annuities?

 

Most brokers are uneducated, due to the fact they are trained to keep "Money Under Management" and use products that puts clients money at risk by selling products such as Stocks, Bonds, Mutual Funds and Variable Annuities. Indexed and Fixed annuities are not considered "Money under Management" and are regulated by the Insurance Department in your state. The Department of Insurance does not allow for an annuity to be sold that does not have guarantees of the clients principal plus interest gained as long as the client adheres to the terms in the contract. If there is any fee at all charged to a client is very limited. Most contracts do not have any fees at all except for a rider option you may choose. All fees charged are not paid to either the Representative or the Insurance Department. All fees are retained by the insurance company.

 

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