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WHAT IS AN ANNUITY?
Before we define an annuity, it is important to know that record number of individuals are purchasing annuities in record amounts. Annuities NOW account for $410 billion or 14% off the total savings amassed by families in the United States.
An annuity in its basic form is a series of payments (income) made at regular intervals over a period of time, usually an individuals lifetime and or spouses lifetime.
TYPES OF ANNUITY CONTRACTS
Annuity contracts may be either immediate or deferred. Immediate annuity contracts provide income payments that start shortly after you pay the premium. Deferred annuity contracts provide income payments that start later, often many years later.
Annuity contracts may be either single premium or installment premium. Single premium contracts require you to pay the company only one premium. Installment premium contracts are designed for a series of premiums. Most of these are flexible premium contracts; they allow you to pay as much as you wish, within specified limits.
ANNUITY CONTRACT FEATURES
An annuity is fundamentally the classic investment choice for the safety and income minded baby boomer and senior investor. They provide more features than virtually any other investment and have been available for over 100 years. Some of the better features include:
- High compounding current interest
- Safety of principal
- 3-Way tax deferred growth (interests on principal, interest on interest and interest on taxes that would have normally gone to Uncle Sam)
- No commission charge to the client
- Avoidance of probate
- Withdrawal options
- Tax-free exchanges
- IRS qualified or non-qualified accounts
- Interest only payments, keeping your principal intact
- An income you can never out live
- Low maintenance
Annuities can be tailored to a variety of financial and estate planning objectives and perhaps one of the most popular planning tools used today.
CHARGES
A typical contract may contain one or more of the following types of charges. (Note companies may refer to these charges by different names):
Percentage of Premium Charge. This charge, often called a "load," is deducted from each premium paid. The percentage may reduce after the contract has been in force for a certain number of years or after total premiums paid have reached a certain level.
Contract Fee. This is a flat dollar amount charged either at issue or annually.
Transaction Fee. This is a charge per premium payment or other transaction.
Surrender Charge. This charge is usually a percentage of the value of the contract or of premiums paid. The percentage may be reduced after the contract has been in force for a certain number of years.
INTEREST
The interest rate used to accumulate contract values may never be less than the guaranteed rate stated in the contract. In practice, the interest rate actually used by a company, usually referred to as the "current" rate, is often higher. The company may change the current rate from time to time, buy it cannot be lower than the guaranteed rate.
Annuity contracts provide a number of benefits. while the annuity income benefit is the primary one, the other benefits set out below are also important.
Annuity income benefit
Income payments are usually made monthly, although other frequencies are available. The amount of the annuity payments is based on both the value of the contract and the contract's "benefit rate" when annuity payments begin. This benefit rate depends on your age, sex and the annuity form you have chosen.
Annuity contracts contain a table of guaranteed benefits rates. Most companies periodically develop "current" benefit rates as well; these rates are subject to change by the company at any time. When the annuity payments begin, the company will determine the amount of each payment according to the current benefit rates then in effect if these are more favorable to you. If the guaranteed benefit rates would provide higher income payments, those rates will be used . Once payments begin, they are unaffected by any future rate changes.
The most commonly available annuity forms are:
Straight Life. The annuity is paid as long as you are alive. There are no further payments to anyone after your death.
Life With Period Certain. The annuity is paid as long alas you aware alive. If you die before the end of the period referred to as the " certain period," the annuity will be paid to your beneficiary for the rest of that period. Typical certain periods are 10 or 20 years.
Joint and Survivor. The annuity is paid as long as either you or another named annuitant is still alive. A period certain must also be available.
Death Benefit- Most contracts provide that, if you die before the annuity payments start, the contract value will be paid to your beneficiary. Some contracts provide that the death benefit will be the total premiums paid if that amount is greater than the value of the contract.
Surrender Benefit- Most annuity contracts allow you to surrender your contract if income payments have not yet started. Upon surrender, the contract terminates. The surrender benefit is equal to you contract value less surrender charge, if any.
Many annuity contracts also provide that you may withdraw a portion of you contract value, under certain conditions, without terminating the contract.
Waver of Premium Benefit- Some companies offer a benefit which will pay premiums for you if you become disabled. A charge is made for this benefit.
HOW MUCH SHOULD I BUY?
Before buying, ask yourself these questions:
1. How much annuity income will I need in addition to social security, pensions, savings and investments?
2. Will I need an income only for myself or for someone else also?
3. How much can I afford to pay in premiums?
4. How will the annuity contract figure in with my total financial planning?
OTHER POINTS TO PONDER
Be certain that you understand the effect of all charges that will be made under the contract.
Check whether the annuity contract allows you to change the amount of you premium payments. Find out what happens if you stop paying premiums altogether.
If you are buying an annuity contract for an Individual Retirement Account (IRA) or another tax deferred retirement program, make sure you are eligible. Also, make sure you understand any restrictions connected with the program.
If you are shown a presentation which illustrates tax savings, find out what assumptions are used. Make sure the assumptions apply in your case.
READ THE CONTRACT!
When you receive your annuity contract, read it carefully. Ask the agent and the company for an explanation of anything you do not understand.
If you have a specific complaint or cannot get the answers you need from the agent or company, please contact you state insurance department.
Click here for information about RAC and questions most annuity buyers ask.
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