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Annuities
How
an Annuity Works
When
you purchase a fixed annuity, your account earns a fixed rate of
interest that accumulates on a tax-deferred basis. The principal and
interest are usually backed by the financial strength of the
insurance company that issues the annuity. Along with this guarantee,
some insurance companies also may provide a return-of-principal
guarantee that safeguards beneficiaries against loss of principal. In
addition, since the death benefit is paid directly to your
beneficiary(ies), the annuity proceeds are not generally subject to
probate.
There
are usually withdrawal privileges during the accumulation period of
an annuity, although there may also be federal income tax penalties
for withdrawals taken before age 59½. Withdrawals in excess of
permitted amounts are also generally subject to early withdrawal
charges. These withdrawal penalties are in return for the privilege
of allowing assets to build tax-deferred.
When
you are ready to start receiving income, which is called the payout
period, you can receive a steady flow of income for life or a stated
number of years. Annuities can also be styled to cover the lifetimes
of one or two people, usually a husband and wife. Alternatively, you
may take the build-up of assets as a lump sum, or a single sum can be
paid directly to your beneficiary(ies), usually free of probate.
Benefits
of Annuities
Safety
of principle—The insurer guarantees the return of your principal
Tax
deferral—Taxes on the annuity interest are deferred until money is
withdrawn
Yield—Purchase
premiums are guaranteed to earn a set rate of interest for a specific
time period.
Lifetime
income—If you select a life income option you’ll receive income
for life.
Estate
planning—The annuity value is paid directly to your beneficiary,
without withdrawal charges, generally avoiding the expense, delay and
frustration of probate.
Types
of Annuities
A
fixed annuity is a contract between you and an insurance
company that offers you a fixed rate of interest on your money. You
may either: (1) purchase an annuity outright with a lump-sum payment
(a single-premium annuity); or (2) make an initial purchase
payment and subsequent contributions (a flexible-premium annuity).
When
purchasing an annuity contract, you may wish to consider when you
will want to receive income from your contract. An immediate annuity
allows you to receive income right away, while a deferred annuity
allows you to build your account value over time and convert it to
income in the future.
Whichever
type of fixed annuity you choose, your assets grow tax-deferred,
meaning no income taxes are due unless you choose to withdraw money.¹
In fact, because of their tax-deferred status and other features,
fixed annuities have become a popular way for people to save for
retirement.
Annuity
Phases
Build-Up
Period
During
the build-up period, interest compounds three ways: on your
principal, on your interest and on the tax dollars you would normally
pay. The company that issues the annuity sets the current rate of
interest that is paid. This rate can be adjusted from time to time.
Fixed annuities, however, have a guaranteed minimum interest rate
that issuers will pay, regardless of market fluctuations.
Pay-Out
Period
Tax-deferred
annuities let you build income for the future. Then, when you are
ready, annuities offer a number of ways for you or another designated
payee to receive income.
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Life
income allows the annuitant to receive income for life; when the
annuitant dies, the payments cease.
-
Life
income with period certain provides for payments over the lifetime
of the annuitant or a set number of years, whichever is longer. If
the annuitant dies before the “period certain” ends, the
remaining assets are paid to the beneficiary(ies), as scheduled.
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Period
certain only provides for payments to be made for a specific time,
usually five to 20 years.
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Joint
and survivor income provides payments as long as either of the
annuitants is alive.
First Choice Insurance Agency works with several insurance companies such as American General,
American National, John Hancock, Lincoln Benefit, and many others to find the
right product for your needs.
Contact us for more information!
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