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Annuities 101

What is a fixed annuity, variable annuity?

Simply put, both fixed annuity and variable annuity are amounts paid annually. In particular, they are contracts offered by insurance companies that allow you to save money for retirement on a tax-deductible basis and then, if you choose, a guaranteed income for life or for a certain period of time. get paid as five, ten or twenty. years Payments are usually made monthly, but many companies offer to make payments quarterly, semi-annually, or annually. Most of this discussion will focus on fixed annuities.

How do they work?

Both fixed annuities and variable annuities are vehicles for accumulating retirement savings. You pay a premium to an insurance company and they promise to pay you interest. Unlike other retirement savings vehicles, you don’t have to pay income tax on your gains as long as you keep your money with the insurance company.

This is what is known as ‘tax deferral’. Only when you decide to withdraw your funds are your gains subject to income tax. A fixed annuity also differs from other retirement savings plans in another important way. When you decide to withdraw your funds, the insurance company will give you the option of receiving a guaranteed income for as long as you live.

What are the advantages?

All fixed annuities have three primary advantages: Tax Deferral, Exchange Exclusion, and a Guaranteed Lifetime Income.

Who offers fixed annuity products?

Fixed annuities are only offered by insurance companies that are licensed to write life insurance and annuities by the state in which you live. Most insurance companies have financial requirements that specify the minimum reserves the company must maintain on its policies.

Who sells them?

Only agents licensed by states to sell life insurance can sell you a fixed annuity. This includes any licensed life insurance agent in your state as well as most financial planners and stock brokers.

Why is Guaranteed Lifetime Income an advantage?

Annuities are the only savings vehicle that offers a guaranteed income for life. As with any other type of savings plan you can never be sure that your income will last as long as you live. The insurance company calculates a guaranteed income payment based on your age, life expectancy and interest rates that it will pay the loan. That money is guaranteed for as long as you live.

Most insurance companies will also offer a guaranteed income rate for a specific period such as five to twenty years. The guaranteed lifetime income may be based on your lifetime alone, or based on your lifetime and a joint beneficiary, usually your spouse. In case of a joint settlement, the monthly income from your fixed annuity will continue until the last one dies.

What is a Tax Deduction?

A tax-deferred fixed asset receives special tax benefits. Under current tax laws, any interest or gain is not taxable, meaning the tax payable on the gain is deferred until you start receiving income. So, since you don’t pay taxes when your money is compounded, you earn interest in three ways—interest on your principal, interest on your interest, and interest on the taxes you would have paid if those taxes hadn’t been deferred. This results in increased income potential of a deferred annuity over a bank CD or other fully taxable income.

Why is Probate Disposal Advantageous?

Another key advantage over most investment vehicles common to all annuities is the ability to pass income directly to a beneficiary upon your death. Probate is a legal process for validating a will. Assets in an estate generally cannot be passed on to heirs unless the probate court determines the validity of the will and authorizes the executor to distribute them. Because an investigation is a judicial process, the process can take between six and twelve months, and legal costs can be significant.

On the other hand, proceeds from annuities and life insurance are not subject to probate and may be sent directly to your designated beneficiary without passing probate.
What is required of the insurance company to fulfill its obligations?

In order to protect the funds of its policyholders or policyholders, an insurance company must meet strict financial requirements. The most important is the need to build a reserve that should always be equal to the withdrawal or surrender value of their entire block of variable and fixed policies or contracts.

In other words, the insurance company must set aside money equal to the surrender value (principal plus interest less early withdrawal or surrender charges) of each annuity contract in force. In addition to these reserve requirements, state laws also require certain capital and surplus levels to further protect policyholders or policyholders.

Immediate Annuity

Immediate payment provides a fixed annuity payment that begins immediately after the purchase date. Payments may be scheduled monthly, quarterly, semi-annually or annually depending on the initial agreement.

Typically the proceeds from a life insurance policy or the sale of a home are used to fund an immediate annuity. Such annuities provide immediate, regular income for a fixed period (5, 10, 15, 20 years) or for life, depending on the choices made by the annuity holder.

Deferred Annuity

A deferred annuity provides for payments to begin at a future date known as the maturity date. A deferred annuity has an accrual period and a payment or distribution period.
For example, an average annuity can provide supplemental income in their retirement years by purchasing a deferred fixed annuity. The lump sum or regular regular payments will be deposited into the annuity account as it accumulates, then at age 65 when the annuity is due, additional income will be available through scheduled annuity payments.

Single Premium Annuity

A fixed annuity may be purchased for a single premium in which a single payment establishes the contract.

The most common sources of such lump sums are proceeds from the death benefit of life insurance, selling a house or winning the lottery.

Flexible Premium Scale

A fixed annuity may be funded over time with an initial premium plus reasonable additional premiums.
Both premium amounts and frequency may be reasonable, thus accommodating simple cash plans such as salary reductions over several years of employment as well as changes in the owner’s financial situation.

What is a Fixed Index Annuity?

A fixed annuity (also called an indexed annuity, an annuity or equity indexed annuity) is a fixed annuity with a higher income capacity and a guarantee against loss of principal. Its earnings are tied to a market or asset index such as the Standard & Poor’s 500 Composite Index or, more simply, the S&P 500. Fixed index annuities (FIAs) have four guarantees:

1. The initial premium is guaranteed

2. Minimum rate of return

3. Take credit for increases in the market, not corrections.

4. The achievement is locked every year

How are they different from other fixed annuities?

The main difference between a regular fixed annuity and other fixed annuities is the way the annuity or income is credited to your account. A traditional fixed income loan pays interest with an annuity calculator specified in the contract and may or may not be subject to market adjustments. A fixed annuity allows for an interest loan formula based on changes in the equity market to which it is linked. This formula determines how the interest is calculated, the credit, how much extra interest you get and when you get it.

An insurance carrier that issues a fixed annuity also promises to pay a guaranteed minimum rate of interest. Even if the indexed earnings are lower, the minimum guarantee will apply and your account value will not fall below the guaranteed minimum. Both fixed term contracts and single premium deferred contracts guarantee a minimum interest rate, usually between 1.5% to 3% based on between 90% and 100% of the premium paid. The insurance company’s settlement calculator will adjust the account values ​​at the end of each period.

What are the contract features or ‘Moving Parts’?

The amount of excess interest that may be allocated to a given fixed annuity is most affected by the Indexing Method and the Participation Rate as form and function work together.

INDEXING METHODS is the design by which the amount of change in the index is measured. For example, a method that measures the difference between the initial index level and the level at the one-year anniversary is a point-by-point annual method. If this design increases the account value (new principal) with each annual gain, the indexing method includes an Annual Return feature. Currently, the industry’s best-selling equity annuity is the MasterDex Annuity series from Allianz, which features an advanced “monthly” point-by-point design with annual resets. The functional differences in indexing methods will be explained in detail below.

Like a grid, the CONTRIBUTION RATE determines how much of the index increase will flow into the value of the annuity account. Let’s say the fixed income calculator shows a 12% increase in the index, but your participation rate limits you to 70% profit. The percentage of your compensation increase will be 70% of 12%, or 8.4%. Contribution rates are variable and may only be guaranteed for a specific period or may be guaranteed not to be adjusted below a specified minimum or above a specified maximum. One of the most popular indexed annuities is the Keyport Index Multipoint from Sun Life Financial, which guarantees a 100% participation rate for the entire contract period.

Some fixed annuities have a CAP or ceiling on the annuity rate, setting the upper limit that the annuity can earn. A year that earns an interest-related rate of, say, 9%, may only have 7%, which will be the amount of the credit increase.

Some exchanges use AVERAGING to measure the highs and lows of the relevant equity market index. A monthly average, for example, would use an exchange rate calculator that divides each month-to-month indicator closing value by 12.

Some annuities reduce the interest-related rate by reducing the SPREAD, MARGIN, or FEE and crediting the balance. A positive change in the index of 11%, for example, with an administrative fee of 2.5%, would give a net increase of 8.5%. For carriers selling exchange products on a spread, margin or fee, such amounts will be deducted only if the remaining markup change is a positive revenue margin.

Indexing Methods

Annual conversion: The yield is determined annually by comparing the index value at the end of the contract year with the index value at the beginning of the contract year. The positive difference, if any, is the yield your fixed term annuity earns for the year. The new positive (not negative) account value is reset to become the new starting point for the next year. Contrast this formula with owning a variable annuity or a direct investment in a bear market. With variables and stocks it may have a deep valley to climb out of before it returns to zero.

High Water Mark: The yield is determined by the rise in the index value at the annual anniversary points of the contract during the period. The positive difference, if any, is determined by comparing the highest index value with the index value at the beginning of the term.
Point-to-Point: The yield, if any, is determined by comparing the difference between the index value at the end of the period and the index value at the beginning of the period. The positive difference is added to your annuity account value at the end of the term.

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