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Immediate Annuities- Are They Right For You?

This Blog Is Sponsored By Soundview Financial’s Annuity Buying  Guide. For more information on  Annuities, please visit the Annuity Buying  Guide by clicking here.

Early this week, The Wall Street Journal published a story on fixed immediate annuities gaining popularity in light of the lower interest rates currently being offered to retirees by traditional fixed income investments such as bonds, CDs and money market accounts. Here is a quick oveview of immediate annuities:

Immediate annuities can provide dependable financial security: a stream of income payments guaranteed to continue for the rest of your life or for a period you select. If you are about to retire, an immediate annuity may be a good place to put a large lump sum of money accumulated for retirement through another savings or investment vehicle. You also can convert your deferred annuity into an immediate annuity to start receiving income.

To purchase an immediate annuity, you make a one-time payment, and distributions typically begin within a month. Immediate annuities can be fixed or variable, just like deferred annuities. The income payments you receive from fixed immediate annuities are based on the amount you contribute, your age and the interest rate environment at the time of purchase. The payments to you will not change. The payments from variable immediate annuities fluctuate based on the performance of the investment options you choose. Although payments may go up or down, variable annuities are designed to provide income that can rise over time to help you keep pace with inflation.

The principal in an immediate annuity is not readily accessible. If you need more money than the income provided by the immediate annuity, you can minimize this drawback by keeping some of your retirement funds in a liquid account, such as a savings account or money market fund. There also is a chance you may lose some of your principal. If you choose an income for life option with no refund guarantee, and you should die before your principal is all paid out, the balance of your principal and any earnings will go to the insurance company rather than to your heirs. Fortunately, annuities offer several guaranteed payout options.

An immediate annuity is most appropriate for people who want to:

  • Retire in the very near future, or are already retired
  • Begin drawing an income from a lump sum of money that they currently have
  • Derive an immediate return on their investment
  • Receive a steady monthly check for the rest of their live

Remember that a fixed annuity guarantees you a set payment for a long period of time – possibly the rest of your life. But you might live longer than you think. Those payments you started getting when you first retired won’t change at all- so you loose purchasing power if the is inflation. Also, be sure to understand what happens to the annuity payments when you die.   If the annuitant opts for a ‘life income’ option, the insurance company will be under an obligation to pay income for the rest of his life. However, if he dies within a month of buying an immediate annuity plan, the insurance company will pocket the entire contribution and his heirs will not get a single dime.  Be sure to fully understand all the terms and conditions of an immediate annuity before signing on the “dotted” line.

Annuities and Deceptive Sales Practices

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

Annuity sales to senior citizens have significantly increased in recent years. However, as annuity sales have risen, so has a sense of confusion among consumers. This is due, in part, to questionable or deceptive sales practices employed by companies and agents looking to take advantage of uninformed consumers. It is extremely important, when considering whether or not to buy an annuity, to take the necessary precautions in order to make an informed decision that is best for you.

To advise consumers on the growing threat of deceptive sales practices in the annuity industry, the National Association of Insurance Commissioners (NAIC) has issued an alert in order to provide some insight on annuities generally and on strategies to avoid deceptive sales practices more specifically.

First, before purchasing an annuity, the NAIC recommends that you determine whether or not an annuity is right for you. To find out if an annuity is right for you, analyze the amount of money you are willing to invest in an annuity, as well as how much of a monetary risk you are willing to take. You shouldn’t buy an annuity to reach short-term financial goals. When determining whether an annuity would benefit you, ask yourself the following questions:
-How much retirement income will I need in addition to what I will get from Social Security and my pension plan?

-Will I need supplementary income for others in addition to myself?

-How long do I plan on leaving money in the annuity?

-When do I plan on needing income payments?
-Will the annuity allow me to gain access to the money when I need it?

-Do I want a fixed annuity with a guaranteed interest rate and little or no risk of losing the principal?

-Do I want a variable annuity with the potential for higher earnings that aren’t guaranteed and the possibility that I may risk losing principal? Or, am I somewhere in between and willing to take some risks with an equity-indexed annuity?

After you have determined that an annuity is right for you, you should understand the details of the specific annuity you are buying. The NAIC suggest a few ways to protect yourself:

-Always review the contract before you decide to buy an annuity. Terms and conditions of each annuity contract will vary.

-You should understand the long-term nature of your purchase. Be sure you plan to keep an annuity long enough so the charges don’t take too much of the money you invest.

-Compare information for similar contracts from several companies. Comparing products may help you make a better decision.

-Ask your agent and/or the company for an explanation of anything you don’t understand.

-Remember that the quality of service you can expect from the company and the agent should be an important factor in your decision.

-Verify that the company and agent are licensed. In order to sell insurance in your state, companies and agents must be licensed. To confirm the credibility of a company or agent, contact your state insurance department.

-Legitimate insurers have their “creditworthiness” rated by independent agencies such as Standard & Poor’s, A.M. Best Co. or Moody’s Investors Services. An “A+++” or “AAA” rating is a sign of a company’s strong financial stability. You can check a company’s rating online or at your local library.

As you complete your research and decide to purchase a particular policy, it’s important to keep detailed records. Get all rate quotes and key information in writing. Once you’ve made a purchase, keep a copy of all paperwork you complete and sign, as well as any correspondence, special offers and payment receipts.

To avoid being fooled by deceptive sales practices, here are some tips from the NAIC:

o High-pressure sales pitch. If a particular group or agent has contacted you repeatedly, offering a “limited-time” deal that makes you uncomfortable or aggravated, trust your instincts and steer clear.

o Quick-change tactics. Skilled scam artists will try to prey on your “time fears.” They may try to convince you to change coverage quickly without giving you the opportunity to do adequate research.

o Unwilling or unable to prove credibility. A licensed agent will be more than willing to show adequate credentials.

o Remember, if it seems too good to be true, it probably is!

o If you suspect you’ve been a victim of deceptive sales practices, or you have a specific question and can’t get the answers you need from an agent or the insurance company, contact your state insurance department. You can link to its Web site by visiting http://www.naic.org/.

 

For more information on annuities and other retirement planning strategies, please visit Soundview Financial’s Retirement Savings Guide.

 

Variable Annuities- Variable Annuity Costs and Charges

This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

In earlier posts we provided you with a basic overview of variable annuities and the details on how variable annuities work. Of course, you can always get more information and helpful articles, tips and links at Soundview Financial’s Retirement Savings Guide by clicking here. Now, for the fun stuff–a post on variable annuity costs and charges. The source for this information is the Securities and Exchange Commission. Here goes…

You will pay several charges when you invest in a variable annuity. Be sure you understand all the charges before you invest. These charges will reduce the value of your account and the return on your investment. Often, they will include the following:

Surrender Charges. If you withdraw money from a variable annuity within a certain period after a purchase payment (typically within six to eight years, but sometimes as long as ten years), the insurance company usually will assess a “surrender” charge, which is a type of sales charge. This charge is used to pay your financial professional a commission for selling the variable annuity to you. Generally, the surrender charge is a percentage of the amount withdrawn, and declines gradually over a period of several years, known as the “surrender period.” For example, a 7% charge might apply in the first year after a purchase payment, 6% in the second year, 5% in the third year, and so on until the eighth year, when the surrender charge no longer applies. Often, contracts will allow you to withdraw part of your account value each year – 10% or 15% of your account value, for example – without paying a surrender charge.

Example: You purchase a variable annuity contract with a $10,000 purchase payment. The contract has a schedule of surrender charges, beginning with a 7% charge in the first year, and declining by 1% each year. In addition, you are allowed to withdraw 10% of your contract value each year free of surrender charges. In the first year, you decide to withdraw $5,000, or one-half of your contract value of $10,000 (assuming that your contract value has not increased or decreased because of investment performance). In this case, you could withdraw $1,000 (10% of contract value) free of surrender charges, but you would pay a surrender charge of 7%, or $280, on the other $4,000 withdrawn.

Mortality and expense risk charge. This charge is equal to a certain percentage of your account value, typically in the range of 1.25% per year. This charge compensates the insurance company for insurance risks it assumes under the annuity contract. Profit from the mortality and expense risk charge is sometimes used to pay the insurer’s costs of selling the variable annuity, such as a commission paid to your financial professional for selling the variable annuity to you.

Example: Your variable annuity has a mortality and expense risk charge at an annual rate of 1.25% of account value. Your average account value during the year is $20,000, so you will pay $250 in mortality and expense risk charges that year.

Administrative fees – The insurer may deduct charges to cover record-keeping and other administrative expenses. This may be charged as a flat account maintenance fee (perhaps $25 or $30 per year) or as a percentage of your account value (typically in the range of 0.15% per year).


Example:
Your variable annuity charges administrative fees at an annual rate of 0.15% of account value. Your average account value during the year is $50,000. You will pay $75 in administrative fees.
Underlying Fund Expenses – You will also indirectly pay the fees and expenses imposed by the mutual funds that are the underlying investment options for your variable annuity.

Fees and Charges for Other Features – Special features offered by some variable annuities, such as stepped-up death benefit, a guaranteed minimum income benefit, or long-term care insurance, often carry additional fees and charges. Remember that you will pay for each benefit provided by your variable annuity. Be sure you understand the charges. Carefully consider whether you need the benefit. If you do, consider whether you can buy the benefit more cheaply as part of the variable annuity or separately (e.g., through a long-term care insurance policy).

Other charges, such as initial sales loads, or fees for transferring part of your account from one investment option to another, may also apply. You should ask your financial professional to explain to you all charges that may apply. You can also find a description of the charges in the prospectus for any variable annuity that you are considering. Remember to fully understand the costs and charges for the variable annuity before you sign any paperwork.

For links to variable annuity information and quotes, click here.

For more information on variable annuities and other retirement planning strategies, please visit Soundview Financial’s Retirement Savings Guide by clicking here.

Variable Annuities- How Variable Annuities Work

In an earlier post, we discussed the growing popularity of variable annuities as a strategy to complement your other retirement planning investments such as IRAs and 401(k)s. Remember to visit Soundview Financial’s Retirement Savings Guide for more articles, tips and resources on annuities. In this post, we will discuss how variable annuities work. The source for this information is the Securities and Exchange Commission. Here goes…

A variable annuity has two phases: an accumulation phase and a payout phase.

During the accumulation phase, you make purchase payments, which you can allocate to a number of investment options. For example, you could designate 40% of your purchase payments to a bond fund, 40% to a U.S. stock fund, and 20% to an international stock fund. The money you have allocated to each mutual fund investment option will increase or decrease over time, depending on the fund’s performance. In addition, variable annuities often allow you to allocate part of your purchase payments to a fixed account. A fixed account, unlike a mutual fund, pays a fixed rate of interest. The insurance company may reset this interest rate periodically, but it will usually provide a guaranteed minimum (e.g., 3% per year).
Example: You purchase a variable annuity with an initial purchase payment of $10,000. You allocate 50% of that purchase payment ($5,000) to a bond fund, and 50% ($5,000) to a stock fund. Over the following year, the stock fund has a 10% return, and the bond fund has a 5% return. At the end of the year, your account has a value of $10,750 ($5,500 in the stock fund and $5,250 in the bond fund), minus fees and charges (to be discussed in a future post).

Your most important source of information about a variable annuity’s investment options is the prospectus. Request the prospectuses for the mutual fund investment options. Read them carefully before you allocate your purchase payments among the investment options offered. You should consider a variety of factors with respect to each fund option, including the fund’s investment objectives and policies, management fees and other expenses that the fund charges, the risks and volatility of the fund, and whether the fund contributes to the diversification of your overall investment portfolio. The Securities and Exchange Commission’s (SEC) online publication, Mutual Fund Investing: Look at More Than a Fund’s Past Performance, provides information about these factors. Another SEC online publication, Invest Wisely: An Introduction to Mutual Funds, provides general information about the types of mutual funds and the expenses they charge.

During the accumulation phase, you can typically transfer your money from one investment option to another without paying tax on your investment income and gains, although you may be charged by the insurance company for transfers. However, if you withdraw money from your account during the early years of the accumulation phase, you may have to pay “surrender charges,” which will be discussed in a future post. In addition, you may have to pay a 10% federal tax penalty if you withdraw money before the age of 59½.

At the beginning of the payout phase, you may receive your purchase payments plus investment income and gains (if any) as a lump-sum payment, or you may choose to receive them as a stream of payments at regular intervals (generally monthly).

If you choose to receive a stream of payments, you may have a number of choices of how long the payments will last. Under most annuity contracts, you can choose to have your annuity payments last for a period that you set (such as 20 years) or for an indefinite period (such as your lifetime or the lifetime of you and your spouse or other beneficiary). During the payout phase, your annuity contract may permit you to choose between receiving payments that are fixed in amount or payments that vary based on the performance of mutual fund investment options.

The amount of each periodic payment will depend, in part, on the time period that you select for receiving payments. Be aware that some annuities do not allow you to withdraw money from your account once you have started receiving regular annuity payments.

In addition, some annuity contracts are structured as immediate annuities, which means that there is no accumulation phase and you will start receiving annuity payments right after you purchase the annuity.

The Death Benefit and Other Features. A common feature of variable annuities is the death benefit. If you die, a person you select as a beneficiary (such as your spouse or child) will receive the greater of: (i) all the money in your account, or (ii) some guaranteed minimum (such as all purchase payments minus prior withdrawals).

Example: You own a variable annuity that offers a death benefit equal to the greater of account value or total purchase payments minus withdrawals. You have made purchase payments totaling $50,000. In addition, you have withdrawn $5,000 from your account. Because of these withdrawals and investment losses, your account value is currently $40,000. If you die, your designated beneficiary will receive $45,000 (the $50,000 in purchase payments you put in minus $5,000 in withdrawals).

Some variable annuities allow you to choose a “stepped-up” death benefit. Under this feature, your guaranteed minimum death benefit may be based on a greater amount than purchase payments minus withdrawals. For example, the guaranteed minimum might be your account value as of a specified date, which may be greater than purchase payments minus withdrawals if the underlying investment options have performed well. The purpose of a stepped-up death benefit is to “lock in” your investment performance and prevent a later decline in the value of your account from eroding the amount that you expect to leave to your heirs. This feature carries a charge, however, which will reduce your account value.

Variable annuities sometimes offer other optional features, which also have extra charges. One common feature, the guaranteed minimum income benefit, guarantees a particular minimum level of annuity payments, even if you do not have enough money in your account (perhaps because of investment losses) to support that level of payments. Other features may include long-term care insurance, which pays for home health care or nursing home care if you become seriously ill.

You may want to consider the financial strength of the insurance company that sponsors any variable annuity you are considering buying. This can affect the company’s ability to pay any benefits that are greater than the value of your account in mutual fund investment options, such as a death benefit, guaranteed minimum income benefit, long-term care benefit, or amounts you have allocated to a fixed account investment option.

Remember that you will pay for each benefit provided by your variable annuity. Be sure you understand the charges. Carefully consider whether you need the benefit. If you do, consider whether you can buy the benefit more cheaply as part of the variable annuity or separately (e.g., through a long-term care insurance policy).

In future posts, we will discuss the costs associated with variable annuities as this will impact the amount of payments to you. In the meantime, for more information on variable annuities and other retirement planning strategies, please visit Soundview Financial’s Retirement Savings Guide by clicking here.

Variable Annuities- The Basics

Longer life spans and a declining role of traditional employer-sponsored pension plans have placed more emphasis on annuities and other retirement savings products. In this post, we will discuss variable annuities. Of course, more information on variable annuities and other retirement savings strategies can be found at Soundview Financial’s Retirement Savings Guide.

Variable annuities have become an attractive product for companies to sell and for investors to buy since they can provide an income stream for a set number of years or the rest of your life. Variable annuities, however, are not without risk. The income stream and principal value are dependent on the performance of the underlying investments.

Given the increased interest in variable annuities, we wanted to provide you with an introduction to this type of annuity. The source for this information is the Securities and Exchange Commission. Here goes….

A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.

A variable annuity offers a range of investment options. The value of your investment as a variable annuity owner will vary depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.

Although variable annuities are typically invested in mutual funds, variable annuities differ from mutual funds in several important ways:

First, variable annuities let you receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate). This feature offers protection against the possibility that, after you retire, you will outlive your assets.

Second, variable annuities have a death benefit. If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount – typically at least the amount of your purchase payments. Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount.

Third, variable annuities are tax-deferred. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. When you take your money out of a variable annuity, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates. In general, the benefits of tax deferral will outweigh the costs of a variable annuity only if you hold it as a long-term investment to meet retirement and other long-range goals.

Remember that variable annuities should not replace 0ther investment vehicles, such as IRAs and employer-sponsored 401(k) plans, that may provide you with tax-deferred growth and other tax advantages. A variable annuity should complement your investments in these other vehicles. For most investors, it will be advantageous to make the maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity.

In future posts, we will discuss how variable annuities work and the underlying costs. In the meantime, for more information on annuities and other retirement planning strategies, please visit Soundview Financial’s Retirement Savings Guide by clicking here.

What is an annuity?

 This Blog is sponsored by Soundview Financial’s Retirement Savings Guide. Click here to visit Soundview Financial to get access to helpful articles, tips and resources for retirement planning.

In an effort to help educate our readers on the basics of retirement planning, we wanted to provide you with a brief overview of annuities. The first question is, of course, what is an annuity? Here goes—

In its simplest definition, an annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. 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.

There are generally two types of annuities—fixed and variable annuites. In a fixed annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your account is growing. The insurance company also guarantees that the periodic payments will be a guaranteed amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

In a variable annuity, by contrast, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you will eventually receive, will vary depending on the performance of the investment options you have selected.

An equity-indexed annuity is a special type of annuity. During the accumulation period – when you make either a lump sum payment or a series of payments – the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum.

It’s important to remember that an annuity is neither a life insurance nor a health insurance policy. It is not a savings account or a savings certificate. You should not buy an annuity to reach short-term financial goals. An annuity is a retirement planning tool.

Annuities have several benefits including: providing tax deferred income, avoidance of probate (meaning the proceeds of the annuity can be passed directly to your beneficiary at the time of your death), providing you with a guaranteed income stream for life, and offering a variety of annuity types and payout options. However, annuities present complex issues regarding taxes, fees, and withdrawal strategies that may not make them the best investment choice for you. Consider discussing this type of investment first with a financial planner and your tax advisor before making any decision to purchase an annuity.

For a list of key questions to ask before purchasing an annuity, please click here.

If you’re interested in receiving annuity quotes from multiple companies, please visit our sponsor, 4FreeQuotes by clicking here.

For more information on annuities and other retirement planning strategies, please visit Soundview Financial’s Retirement Savings Guide.