WorkingAmericanBenefits™ 
 

A Retirement Fund Is A Terrible Thing To Waste! 

The last thing one should  want to do is gamble with his or her retirement.  Yet, without a guaranteed return on our money, or a guaranty that we'll have an income for the rest of our lives, that is what most of us are doing with our retirements.  Annuities offer certain guarantees, including a guaranteed income for life.

Annuities

Choose from Tax Sheltered Annuities, Fixed Annuities, Fixed Index Annuities, Variable Annuities and others.

See also Bonus Annuities

(Click for information)

Annuities have been around in Europe for hundreds of years.  Annuities have been in the United States for over 100 years.

An annuity is an investment that is made through an insurance company. It is a contract between the owner and the insurance company, in which the insurance company makes certain guarantees.  Guarantees vary by annuity type.  Today, there are mainly three types of annuities: Fixed Annuity, Fixed Index Annuity and Variable Annuity. Any one of the three can be used as a Tax-sheltered Annuity.

Regardless of the type of annuity the owner chooses, all annuities have two stages: 

1. The accumulation stage becomes effective immediately upon selection of the investment.  During this stage, the account grows cash tax-deferred.  

2. The annuitization stage or payout stage goes into effect immediately upon the disbursement of payments from the annuity.  An annuity can make guaranteed  payments for a specific period of time, including life-time. Income Tax is paid on the interest earned, but not on the principal.

Most annuities allow  a contract owner to  withdraw up to 10% of the annuity's principal annually without a penalty, cost or fees.  The government gives certain tax advantages such as tax-deferred accumulation to the annuity for retirement purposes.  The government frowns on the use of the annuity for other than retirement purposes.  As a consequence, all interest withdrawn prior to the owner attaining age59½ will be subject to a 10% excise tax.  However, there are certain circumstances where the10% excise penalty may be relaxed, such as the annuitant becoming disabled.

Payments into an annuity can be made over a period of time (flexible- premium), or it can be a one-time payment (single-premium).  Annuities can be a deferred type, (payments by the annuity to the annuitant or beneficiary made after a number of years of the annuity's life),  or it can be an immediate type where the payments begin immediately.

There are four parties to an annuity:

• Insurer (Insurance Company)

• Contract Owner

• Annuitant

• Beneficiary

The Insurer

The insurance company is the insurer.  The insurer contracts with the contract owner - the entity that purchased the annuity - to invest the contract owner's money and make the contract owner certain guarantees.  These guarantees, along with the terms and conditions of the annuity and the use of the annuity funds are detailed in the annuity contract.  

Contract Owner

The contract owner is the person or entity that bought the annuity.  The contract owner chooses the type of investments for the annuity from the available options, and has all rights to the following:

• Adding funds to the annuity

• Withdrawing  all or part of the funds of the annuity

• Changing the parties to the annuity contract

• Surrendering or terminating the contract

The contract owner can be one or more individuals of legal age, a minor if the policy lists the minor's custodian, a corporation, a trust or a partnership. The contract owner can also be the annuitant and the beneficiary.  In most annuities, the contract owner is also the annuitant, who is also an individual. The contract owner can dispose of the proceeds of the annuity in any legal way he/she/it chooses.  The contract owner can change the annuitant and the beneficiary at any time.

Annuitant

The annuitant is the person on whose life the contract is based.  The annuity contract remains in force until the annuitant dies or the contract owner terminates the contract. The annuitant must  be an individual and cannot be any other type of entity.  As a rule, the annuitant must be under age 75 on the date the contract is signed.  Most companies limit the annuitant's age at signing to between 70 and 80 years old.

The contract is also signed by the annuitant at the time of the annuity purchase.  But even though the annuitant signs the contract, the annuitant has no control over the annuity.  The contract owner has all control.

Beneficiary

The beneficiary of an annuity can be one or more individuals, or any legal entity.  More than one beneficiary can be specified in the annuity contract, and any combination of beneficiaries can be named.  The contract owner can change the beneficiary at any time to anyone or any legal entity.

 Advantages of Annuities

1. Annuities grow cash tax-deferred.  The contract owner pays no taxes on the interest earned as long as the money remains in the annuity.  Money that would normally be paid out as taxes remain in the account to work for the contract owner.

2. Income tax can be postponed indefinitely.  Taxes can be 

    further deferred if the surviving spouse remarries, or if the surviving spouse is named as the annuitant and the new spouse is the beneficiary.  When both spouses die, the beneficiary is able to postpone taxes for up to an additional 5 years.

3. Annuity funds are managed by professional money managers.  The contract owner does not have to be troubled with the ups and downs of the stock market.

4. Annuities avoid probate.  When an individual dies, the following become part of the deceased estate subject to probate: Assets; Real Estate; Bank Accounts; CD's; Stocks and Bonds; Boats; Vehicles; Clothes.  Probate fees are based on the gross value of the estate.  Annuity values are not included in the gross value of the estate.

5. Unlimited funds may be added to the initial principal of an annuity.  CD's traditionally do not allow funds to be added to the initial  principal.  Many qualified funds such as an IRA limits the amount of money that may be added to the fund. Most annuities allow the contract owners to add to the initial principal to take advantage of high interest rate.

6. Anyone can purchase an annuity.  Only those with earned income are allowed to open an IRA or any other qualified fund.

7. Only an annuity can provide a guaranteed income for life.

8. Withdrawals are allowed:  Up to 10% of the principal of an annuity may be withdrawn annually without a surrender charge penalty. 

9. Loans can be taken:  Up to 50% of the value of an annuity may be taken in the form of a loan, but the loan must be repaid.  Otherwise, it is treated as a partial surrender and made subject to the 10% excise tax penalty if the annuitant is under age 59½.  

Disadvantages of Annuities

1. Annuities are subject to early withdrawal penalties.  The IRS imposes a 10% penalty for withdrawals made prior to the annuitant attaining the age of 59½.  The penalty is not invoked if the annuitant dies, becomes disabled, or annuitize (take systematic payments from the annuity).

2. The insurance company's surrender charge can occur.  Up to 10% of the principal of an annuity may be withdrawn annually without a surrender charge penalty.  However, any amount in excess of the 10% free withdrawal privilege is subject to a surrender charge.

3. Ongoing expenses of a variable annuity.  Variable annuities have an annual  mortality and expense fee, and an annual contract maintenance charge.  The mortality charge is used to pay for the services of the money managers and the guaranteed death benefit feature of the variable annuity, as well as commissions and other overhead.  The fee is frozen and will never change over the life of the contract, but it can be anywhere from 1.2% to 1.5% of the account balance. The maintenance fee ranges from $25 to $50 annually.

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Fixed Annuities

A fixed-rate annuity provides the contract owner with a fixed rate of interest on the money in the annuity for a specific period of time.  There is an initial interest rate which is usually guaranteed for a period of one year (12 months). The rate of interest credited to the annuity in the years following the initial rate, is called the renewal interest rate.  The renewal rate is not guaranteed because it is based upon the performance of the insurance company's own money in its investments.  Depending on the insurance company's investments performances, it can be greater or less than the initial rate. 

There is, however, a lifetime guaranteed rate commonly called the minimum interest rate.  The insurance company guarantees that the interest credited to the annuity contract in any given year will never fall below the minimum interest rate.  By all investment standards, the fixed-rate annuity has no equal.  Its interest rate is guaranteed every day.  

Fixed annuities usually have a money back guarantee.  The insurance company assumes the risk of investing, and the contract owner receives the protection.  The insurance company guarantees the contract owner that if he/she is unhappy with the annuity after 10, 20 or 30 days (depending on the insurance company) after purchasing the annuity, the contract owner may return the annuity to the insurance company and have all of his/her money returned to him/her.

Most fixed annuities have a surrender charge associated with them.  Surrender charge protects the insurance company in the same way the guarantee protects the contract owner.  Surrender charge can be as much as 7% to 10% of the annuity value.  However, it  is setup to decrease in amount from the 7% or 10% down to 0% over a period  of years as defined by the insurance company.  Once the  0% is reached, the contract owner can surrender or terminate the annuity contract without incurring a surrender charge.  Many fixed annuities guarantee that the surrender charge will never dip into the principal. Fixed annuities  guarantee the contract owner the return of his/her/its principal. 

Some of today's competitive fixed annuities have no surrender charge - a feature designed to compete with Certificate of Deposits (CD's) for the client's money.

Some fixed annuities have a bailout clause or escape clause. An insurance company may allow an annuity contract owner to surrender part or all of the annuity without incurring a surrender charge under certain circumstances.  For example; a contract may provide for the owner to surrender the annuity without penalty if the interest rate drops below a certain level, or if the owner becomes a patient in a nursing home, or if the owner is diagnosed with a terminal illness.

Fixed annuities have a  guaranteed death benefit.  When the annuitant dies, the annuity contracts guarantees the beneficiary the entire value of the annuity less any outstanding loans at the time of death.  Like banks, insurance companies must, by law,  have a reserve - i.e., they must set aside a certain amount of money to pay back the annuities if the company's assets are threatened.  This reserve along with the many guarantees a fixed-annuity offers, makes the fixed-annuity a very safe investment. 

Your best sources of Fixed Annuities:

• CHASE Insurance Company
• Americo Financial Life and Annuity Co.
• ALLIANZ Life Insurance Company
• American Equity Investment Life Ins. Co.
• Allstate Life Insurance Company
• ING Life Insurance Company
• Illinois Mutual Life Insurance Company
• Great American Life Insurance Co.

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Fixed Index Annuities

A fixed index annuity provides the contract owner with the option of earning money from the upward performance of the stock market while not experiencing any of its downside, and/or earning money from a  fixed rate of interest on the money in the annuity.  When the contract includes a fixed-rate of return for all or a part of the annuity, the fixed index annuity has a lifetime guaranteed rate commonly called the minimum interest rate.  The insurance company guarantees that the interest credited to the fixed return portion of the annuity contract in any given year will never fall below the minimum interest rate.  A contract owner has the option to put money into any of the available indices and/or in the fixed funds of the annuity. 

Fixed index annuities exercise a series of crediting methods that allow the contract owner upside participation in the growth of a variety of well known and accepted market indices such as the S&P 500*, the NASDAQ 100**, etc.  There are monthly and/or annual caps - meaning - the contract can only earn up to a certain percentage of return either monthly or annually.  However, these caps are way above the returns a fixed-rate annuity would earn.  Monthly and/or annual gains are locked in so that if the market takes a downturn, the gains are not lost but remain fixed where they are.  In a down market, instead of losing earnings, the contract is just not credited with any gains.  Simply put, the contract earns money when the indices go up and lose none of the gains when the indices go down.

Like fixed annuities, fixed index annuities  usually have a money back guarantee.  The insurance company assumes the risk of investing, and the contract owner receives the protection.  The insurance company guarantees the contract owner that if he/she is unhappy with the annuity during the "free look" period after purchasing the annuity, the contract owner may return the annuity to the insurance company and have all of his/her money returned to him/her.

As with most annuities, fixed index annuities have a surrender charge associated with them.  Surrender charge protects the insurance company in the same way the guarantee protects the contract owner.  Surrender charge can be as much as 7% to 10% of the annuity value.  However, it  is setup to decrease in amount from the 7% or 10% down to 0% over a period  of years as defined by the insurance company.  Once the  0% is reached, the contract owner can surrender or terminate the annuity contract without incurring a surrender charge.

Some of today's competitive fixed index annuities have no surrender charge or a short surrender charge period  ( 1 to 3 years) - a feature designed to compete with Certificate of Deposits (CD's) for the client's money.

Some fixed index annuities have a bailout clause or escape clause. An insurance company may allow an annuity contract owner to surrender part or all of the annuity without incurring a surrender charge under certain circumstances.  For example; a contract may provide for the owner to surrender the annuity without penalty if the interest rate drops below a certain level, or if the owner becomes a patient in a nursing home, or if the owner is diagnosed with a terminal illness.

Your best sources of Fixed Index Annuities:

• Americo Financial Life and Annuity Co.
• ALLIANZ Life Insurance Company
• American Equity Investment Life Ins. Co.
• ING Life Insurance Company
• Illinois Mutual Life Insurance Company
• Great American Life Insurance Co.
• F&G Life Insurance Company

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Variable Annuities

A variable annuity is similar to a mutual fund in that they both have investments where the funds are held in an account separate from the insurance company's general account.  They are also similar to the traditional fixed annuity in that retirement payments can be made periodically to the annuitants over a specific period of time.  Variable annuities shift the investment risk from the insurance company to the contract owner.  If the stock market performs well, the contract owner is likely to realize investment growth  that could exceed what would be expected from a fixed annuity.  Conversely, if the market takes a downward turn, the contract owner could experience a severe decrease in the annuity value.

The contract owner has total control of his investment choices.  The insurance company plays no part in directing the investments of the variable annuity. The investments in the insurance company's general account is managed by the insurance company and allows the company to make fixed interest guarantees to the contract owner.  Variable annuities, on the other hand,  invest deferred annuity payments through  the insurance company's separate account because they are based on non-guaranteed equity investments such as common stocks.  The value of the variable annuity fluctuates with the movements of the stock market during both the accumulation and the annuitization phases, affecting the growth of the annuity as well as the income earned from it.

To keep the variable annuity in line with the fixed annuity's accumulation and annuitization concept,  the accumulation unit and the annuity unit, respectively, were created.  During the accumulation period, contributions made by the contract owner, minus expenses, are converted into accumulation units equal to the value of the amount of money spent buying the shares in the underlying stock investment divided by the total number of shares. During the payout or annuitization phase, the accumulation units are converted into annuity units and given a dollar value.

A variable annuity contains a guaranteed death benefit, which provides that when the annuitant dies, the beneficiary will receive:

• The greater of the principal, plus any accumulation, or

• The value of the account on the date of death.

However, associated with the death benefit is annual  mortality and expense fee, and an annual contract maintenance charge.  The mortality charge is used to pay for the guaranteed death benefit feature of the variable annuity, as well as commissions and other overhead.  The fee is frozen and will never change over the life of the contract, but it can be anywhere from 1.2% to 1.5% of the account balance. The maintenance fee ranges from $25 to $50 annually.

Every variable annuity has built-in features that minimize risk and increase return. They are:

1. Professional Money Management:  All variable annuities are managed by professional investment managers, who are well educated in their fields of expertise, are experienced, are backed by research, and who are dedicated to selecting the right investments to achieve the desired objectives of the annuity.

2. Separate Accounts:  The securities investments of a variable account are kept in accounts separate from the insurance general account, and are therefore not affected by the performance of the insurance company's own investments.

3. Diversification:  Investments are made in more than one portfolio. The risk is spread among many securities to reduce the possibility of losing a large amount of money from any stock.

4. Switching Privileges: Most variable annuities allow the contract owner to move money among investment portfolios without incurring penalties and charges as long as the switches do not take place too often.  This allows the contract owner to rebalance his portfolios to take advantage of high returns.

5. Guaranteed Death Benefit:  Provides that if  the annuitant dies during the accumulation phase, the beneficiary will receive the greater of the premium paid into the annuity less withdrawals, or the annuity's current value.

Your best sources of Variable Annuities:

• American Skandia Life Insurance Co.
• ALLIANZ Life Insurance Company
• Pacific Life Insurance Company.
• ING Life Insurance Company
• Illinois Mutual Life Insurance Company

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Tax Sheltered Annuities (Group Plans)

A tax-sheltered annuity (TSA) is a group plan available to certain groups of employees.  TSA's are qualified programs approved under Section 403(b) of the Internal Revenue Code. To qualify for a TSA, the individual must be a member of one of the following three groups:

• School personnel

• Hospital employee

• Member of a non-profit organization.

A tax-sheltered annuity (TSA) has the following characteristics:

• It is purchased from an insurance company.

• The contract can be issued to an individual or a group.

• The participant may choose either a variable or a fixed account.

• The participants contribution may vary from year to year

• Contributions are made through payroll deduction pre-taxed.

• Social Security tax (FICA) is paid on the contribution amount.

• The maximum annual contribution is detailed in a salary reduction agreement, governed by the parameters set by the insurance company, and cannot exceed the IRS set limit.

• Withdrawals may be taken without penalty under the following circumstances: financial hardship; disability; death; and termination of employment.

Tax-sheltered annuities offer  advantages not found in other types of annuities:

• Contributions made to the TSA reduce the participant's taxable income by the amount contributed.

• Contributions are invested in vehicles that grow cash compounded and tax-deferred.

In every other way, Tax-sheltered annuities are the same as all other annuities.

Your best sources of Tax-sheltered Annuities:

• American Skandia Life Insurance Co.
• ALLIANZ Life Insurance Company
• Pacific Life Insurance Company.
• ING Life Insurance Company
• Illinois Mutual Life Insurance Company
• Great American Life Insurance Co.
• F&G Life Insurance Company

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Bonus Annuities (5%, 10%,15% Bonuses)

Insurance companies are competing for your money, and will pay you handsomely to invest with them.  Some insurance companies are offering bonuses of 5%, or 10%, or even 15% of the initial premium you put into either their fixed-rate or fixed index annuity.  Some insurance companies even extend this offer to include any additional premium you put into the annuity in the 5 years following the initial premium.  The bonus is added to the premium at the time it is received by the insurance company, then the entire amount (premium + bonus) is credited with interest.

For example:  An initial premium of $100,000 that is given a 10% bonus ($10,000) will net your annuity $110,000 that is further credited with interest.  If the insurance company is paying 2% guaranteed interest on their fixed-annuity, you are guaranteed to earn $2,200 for the first year, and your fixed-annuity balance at the end of the year will be $112,200. $12,200 return for one year is a 12.2% gain.  If you take an fixed index annuity that participates in the S&P 500 index*, and the index goes up 8 points, you will earn $8,800 for the first year, and your fixed-annuity balance at the end of the year will be $118,800. $18,800 return for one year is a 18.8% gain. 

Please note: For these kinds of bonuses, the insurance company will require you to leave your money in the annuity for at least 7 years, depending on company.  However, you are guaranteed the return of your principal plus any bonus you were given.

*"Standard & Poor's®", "S&P®", "S&P 500®", "Standard & Poor's 500" and "500" are trademarks of The McGraw-Hill Companies, Inc. Fixed index annuities are not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representations regarding the advisability of purchasing this product. The S&P 500 Index is a market-valued weighted price index which reflects capital growth only and does not include dividends paid on stocks.

**NASDAQ®, NASDAQ-100®, and NASDAQ-100 Index® are trademarks of The Nasdaq Stock Market, Inc. (which with its affiliates is referred to as the "Corporations") Fixed index annuities have not been passed on by the Corporations as to their legality or suitability. The Product(s) are not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S).

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©2004 WorkingAmericanBenefits.com and Hemera.  All Rights Reserved.

 During the Depression of the 1920's, it was the insurance  companies, not the federal government that bailed out the banking industry!               

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* Source: Jack Marrion, president of The Advantage Group, St. Louis, MO, 2003.