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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 Generally, the surrender charge is a percentage of the amount withdrawn, and declines gradually over a period of several years, known as the “surrender period.”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.

Discovering the Roth 401(k)

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.

This new retirement savings vehicle first became available on a temporary basis but has been made permanent by Congress. A Roth 401(k) works much like a Roth IRA– you invest already taxed money and after 5 years all withdrawals in retirement (after age 59 1/2) are tax free as compared to a traditional 401(k) or traditional IRA where pretax money is invested but all withdrawals are taxed as ordinary income.

The Roth 401(k) could be a advantageous for high-income individuals who haven’t been able to contribute to a Roth IRA because of the income restrictions. (Eligibility for 2007 phases out between $99,000 and $114,000 for single filers and $156,000 to $166,000 for those who are married and file jointly). There are no income limits for Roth 401(k)s.

In addition, Roth 401(k) accounts will be subject to the contribution limits of regular 401(k)s — $15,500 for 2007, or $20,500 for those 50 or older by the end of the year — allowing individuals to invest significantly more cash in tax-free retirement income than they would through a Roth IRA. (In 2007, Roth IRA contributions are limited to $4,000 a year, or $5,000 for those 50 or older.) Remember that these limits apply to contributions to both types of 401(k) plans, so you can’t save $15,500 in a regular 401(k) and another $15,500 in a Roth 401(k).

Making a decision whether to invest in a Roth 401(k) vs. a traditional 401(k) depends in part on your estimate of your tax rate in retirement. If your tax rate is likely to fall in retirement, a traditional, deductible 401(k) may make sense. If f you expect your tax rate to be the same or higher in retirement than it is now, you might be better off with a Roth 401(k). If you’re not sure of your future tax rates, you may want to consider splitting your contribution between a Roth 401(k) and a traditional 401(k).

For more information on 401(k) plans and other retirement planing strategies, please visit Soundview Financia’s Retirement Savings Guide by clicking here.

Frequently Asked Questions on Reverse Mortgages

In an earlier post, we provided you with a brief overview of reverse mortgages. For this post, we wanted to answer some common questions on reverse mortgages. Of course, for more detailed information, articles and tips, please visit the Reverse Mortgages section at Soundview Financial’s Retirement Savings Guide. Here goes..

What is a Reverse Mortgage?
A reverse mortgage is a special type of loan, which enables you to tap into the equity in your home and receive cash, a tax-free monthly income and/or a line of credit. There are no income or credit qualifications and there are no monthly payments to make. The loan is not repaid until you permanently leave your home.

How Do I Qualify For A Reverse Mortgage?
A reverse mortgage is easy to obtain, provided that:

1. You are at least 62 years of age or older.
2. Your home is or is to be occupied as your primary residence.
3. You have substantial equity in your home (proceeds of the reverse mortgage can be used to pay off existing liens or mortgages).

What Can I Do With the Money?
You can use the money you receive from your reverse mortgage in any way you choose:

• Supplement your income
• Home improvements
• Purchase of a new home
• Pay off a current mortgage
• Medical expenses
• Pay off debt
• Buy a new car
• Travel
• College tuition or gifts to family

In short, the money is your to do what you want…..

How Much Money Can I Receive?
The amount of money you can receive from a reverse mortgage is determined by your home value, the number and age of the homeowner(s) and the current interest rate. Your lender will assist you in evaluating your options and calculate the maximum amount of money that will be available to you.

How Do I Receive the Money?
With a reverse mortgage, you have five payment plan options to choose from:

1. Tenure option: Receive equal monthly payments for as long as you occupy your home as your principal residence.
2. Line of Credit: Draw cash from your reverse mortgage whenever and in whatever amount you choose, up to the available limit. Interest is only charged on the funds drawn from the line of credit.
3. Lump Sum Cash Advance: You can receive all of your money in a lump sum upon the closing of your reverse mortgage.
4. Modified Tenure: Set aside a portion of the loan proceeds as a line of credit, in addition to monthly payments.
5. Term: Receive equal monthly payments for a fixed period of time that you select, for example 5 or 10 years.

How is Interest Charged on a Reverse Mortgage?
The interest on a reverse mortgage is adjustable and is tied to readily available market indexes. The initial rate is determined at loan closing and adjusts either monthly or annually. Interest charges do not affect your monthly payments and you are only charged interest on your loan balance, which consists of the cash you have received and the financed closing costs.

What Costs are Involved with a Reverse Mortgage?
As with a regular mortgage loan, there are closing costs involved with a reverse mortgage as well. These fees can be financed into the loan, and typically include the cost of the appraisal, title insurance, loan origination, escrow and recording fees.

When Does the Reverse Mortgage Need to be Repaid?
The reverse mortgage becomes due and payable when the borrower permanently leaves the home – whether they move, sell or pass away. Reverse mortgages are typically repaid from the proceeds of the sale of the home, with any remaining equity staying with the homeowner or their heirs. If a spouse passes away, the surviving spouse continues to receive the full benefits of the reverse mortgage, with no repayment until they decide to permanently leave the home.

Do I Still Own My Home?
Absolutely. You retain full ownership of your home when you obtain a reverse mortgage. As with any mortgage, the lender has a loan against your property. Since you make no monthly payments, the loan balance increases across time. When the loan is repaid the borrower or their heirs pay off the loan balance, which consists of the financed closing costs, the cash advanced from the reverse mortgage and the interest that has accrued. The remaining equity stays with the homeowner or their heirs.

For additional articles, insights, tips and resources for reverse mortgages, please visit Soundview Financial’s Retirement Savings Guide by clicking here.

When A Simpler 401(k) Plan Is Just Dumb

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.

Here’s a link to an interesting article from The Wall Street Journal Online. In an effort to encourage workers to embrace investing in 401(k) plans, many employers have simplified the investment options. The article suggests that in reducing the investment options, employers may have also reduced the employees’ ability to diversify, leaving them exposed to downturns in the market. The article provides some interesting tips on 401(k) investing and offers a few other tips on IRAs.

At Soundview Financial’s Retirement Savings Guide we offer a few tips on savvy 401(k) investing. We believe that the most important tip on 401(k) investing is to diversify your investments across several asset classes to reduce risk and enhance investment returns. Also, remember that investments are inherently risky so no diversification strategy can completely insulate your from risk or investment losses.

Long-Term Care Insurance- Buying Tips

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.

The Wall Street Journal offers five points to consider while shopping for long term care insurance. Please visit Soundview Financial’s Retirement Savings Guide for more information and tips on long-term care insurance.

1. Inflation Protection. Because long term care insurance pays a set amount per day, it’s important to make sure that the amount can still cover the same portion of expenses you originally intended when it is needed. The general consensus among financial planners and insurance agents is that just about everyone needs inflation protection that compounds at 5% per year.

2. Year of Care. The choices range from 2 years to a lifetime, although premiums for a lifetime policy can cost up to 40% more than one with three years of benefits. Since only 8 in 100 claimants with a 3 year benefit period exhaust their coverage (according to a 2005 actuarial survey), it is recommended that you obtain 3 to 5 years of coverage.

3. Coverage Amount. Your actual coverage amount- often referred to as your “daily benefit”- is another important piece to consider. When considering the amount of the daily benefit, remember that costs vary based on the location of your care.

4. The insurer’s health. Rating services analyze the financial health of the long term care insurers. You can get most ratings online at www.ambest.com, www.moodys.com and www.standardandpoors.com. Remember, you want to make sure your insurer has the financial strength to pay your benefits when needed.

5. Your own health. You current health will be very important when obtaining a long term care insurance policy. Be sure to shop around. Get multiple quotes. Also, remember that long-term care insurance may not be for you. Consult your financial advisor before buying a policy.

If you’re interested in receiving a free quote for long term care insurance from multiple insurance companies, please visit our sponsor, 4FreeQuotes by clicking here.

For more information on long-term care insurance and other retirement planning strategies, please visit Soundview Financial’s Retirement Savings Guide.

Rules To Grow Rich By

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.

I happened to be reading an old issue of Money Magazine and found some interesting tips on investing and retirement planning. Here you go:

1. All else being equal, the best place to invest is a 401(k). Once you’ve earned the full company match, consider maxing out a Roth IRA. If you still have money to invest, invest more in your 401(k) or a traditional IRA.

2. To figure out what percentage of your money should be in stocks, subtract your age from 120.

3. Invest no more than 10% of your portfolio in your company stock–or any single company stock for that matter.

4. The most you should pay in annual fees for a mutual fund is 1% for a large-company stock fund, 1.3% for any other type of stock fund, and 0.6% for a U.S. Bond fund. [Note from author: I prefer index funds and ETFs with low fee structures of less than 0.5%]

5. Aim to build a retirement nest egg that is 25 times the annual investment income you estimate you will need in retirement. So if you want $40,000 per year to supplement Social Security and a pension, you must have $1 million.

6. If you don’t understand how an investment works, don’t buy it.

7. If you’re not saving 10% of your salary, you’re not saving enough.

8. Keep three months’ worth of living expenses in a bank savings account or a money-market fund from emergencies.

9. Aim to accumulate enough money to pay for one-third of your kids’ college costs. You can borrow the rest or cover it from your income. [Note from author: 529 college savings plans are a great way to start saving for college]

10. You need enough life insurance to replace at least 5 years of salary- as much as 10 years if you have several young children or significant debts.

Remember to visit Soundview Financial’s Retirement Savings Guide for helpful articles, tips and resources on retirement planning.