Annuities

Indexed Annuity Advantages and Disadvantages

Presented by Jim Guynan An indexed annuity can be a great way to save for retirement on a tax-deferred basis, in effect creating your own personal “pension” plan. As with any investment, however, there are also potential disadvantages that should be evaluated before purchasing an indexed annuity. ADVANTAGES: * An indexed annuity provides the opportunity to benefit from a rising stock market with an interest rate linked to a market index, while also offering a minimum guaranteed interest rate. * Indexed annuity earnings are tax deferred so long as they remain in the annuity. When compared to an investment whose earnings are taxed each year, tax deferral offers the potential for accumulating significantly higher amounts of money over time. * An annuity can be used to provide a steady source of retirement income that you cannot outlive. * Unlike an IRA or employer-sponsored retirement plan, there are no annual contribution limits to an annuity…you can contribute as much as you want. * Subject to the terms of the contract, there is no required date by which you must begin receiving annuity income payments, providing you with the flexibility to defer payments until you need the income. * If you die while your annuity still has value, the annuity death benefit passes directly to your beneficiary without probate. * In most states, an annuity is free from the claims of a creditor. DISADVANTAGES: * Premiums for a non-qualified annuity are not tax deductible, meaning that they are made with after-tax dollars. * While you can surrender or make withdrawals from an annuity before you begin receiving income payments, the surrender or withdrawal may be subject to a charge if made within a stated number of years after the annuity is initially purchased. Withdrawals will reduce the value of the death benefit and any optional benefits. * There is a risk of losing money if the issuing company does not guarantee 100% of the principle and no index-linked interest is credited, or if the indexed annuity is surrendered while a surrender charge is in effect. * If made prior to age 59-1/2, a surrender or withdrawal will be subject to a 10% federal penalty tax unless one of the exceptions to this tax is met. * When received, investment gains are subject to ordinary income tax rates and not the lower capital gains tax rate. * Once annuity income payments begin, the payment amount cannot be changed and withdrawals above the payment amount generally are not available.
Annuities

Components to an Indexed Annuity

Brought to you by David Corwin Indexed Annuity Contract Features will have an effect on Annuity Performance?  Before purchasing an indexed annuity, it is important to understand various contract features and their potential impact on annuity performance. The Index  Indexed annuities credit interest based on the movement of the stock market index to which the annuity is linked. A market index tracks the performance of a group of stocks representing a specific market segment or the entire stock market. The S&P 500 is the index most commonly used for this purpose. Another index, however, may be used, such as the Dow Jones Industrial Average, NASDAQ 100 or Russell 2000. It is important to understand that when you buy an indexed annuity, you are purchasing an insurance contract and not shares of any stock or index. Indexing Method  An indexed annuity earns a minimum rate of interest and then offers the potential for excess interest earnings based on the performance of the index to which the annuity is linked. The indexing method is the approach used to measure the amount of change in the index and, as a result, has a direct impact on the potential growth of an indexed annuity. Participation Rate  The participation rate determines how much of the increase in the index will be credited to the indexed annuity. The participation rate is usually less than 100%. For example, if the S&P 500 increases by 10% and the participation rate is 80%, the indexed annuity would be credited with 8%. The insurance company may have the right to change the participation rate from year to year or when the annuity is renewed for a new term. Margin/Spread/Administrative Fee  Some indexed annuities subtract a specific percentage from the calculated change in the index before crediting interest to the contract. This “margin,” “spread” or “administrative fee” which may be charged instead of, or in addition to, a participation rate, is subtracted only if the change in the index produces a positive interest rate. Index Term  This is the period over which index-linked interest is calculated and/or the length of time during which withdrawals or surrenders are subject to a charge. Cap Rate  Some indexed annuities put a cap or maximum on the index-linked interest that will be credited to the annuity. For example, if the market index increases 20% and the annuity has a 15% cap rate, only 15% will be credited to the annuity. Not all annuities have a cap rate. Floor  This is the minimum guaranteed interest that will be credited to the annuity. This guarantee is based on the claims-paying ability of the issuing insurance company. Averaging  Some indexed annuities use an average of the changes in the index’s value rather than the actual value of the index on a specified date. Interest Compounding  Some indexed annuities pay simple interest during the index term, while others pay compound interest, meaning that index-linked interest that has already been credited to the contract during the term also earns interest in the future. Exclusion of Dividends  In measuring index gains, most indexed annuities count only equity index gains from market price changes and exclude any gains from dividends. Vesting  In some indexed annuities, none or only part of the index-linked interest is credited to the contract if the annuity is surrendered before the end of the term. The combination of these policy features found in any particular indexed annuity will make a difference in the amount of money your annuity investment will earn and in the amount of money you will receive if you surrender the annuity early. As a result, before you purchase an indexed annuity, it is important that you fully understand the various features in the contract you are considering.
Annuities

Income Rider Advantages

Authored by Jim Guynan Recently I heard that almost 60% of index annuities sold today have an income rider attached to them. Also, that the average time before the income is activated from the rider is only 1.8 years. What does this tell us about fixed index purchases and income riders? Simply, that more than half of the owners of fixed annuities are thinking about the future use of these assets as possible income sources and they are utilizing it in a new way. Before income riders became available there were really only two ways to access an annuity; a 10% penalty free withdrawal per contract year or to annuitize the annuity contract. Now there is a third option which is activating an income rider payout that will provide an income for the rest of the owner’s life. The advantage of this is that the owner does not give up control of the underlying fixed annuity in order to do so. What is interesting to me is that the average time to activate is so short. Many of the illustrations I run for agents show longer deferral times before income is needed. One explanation could be that only those people who need income now are buying the annuities. As time moves on, I believe that more younger people will become educated on the advantages of the riders and take advantage of the longer deferral.
Annuities

Misconceptions Regarding Annuity Fees

Authored by David Corwin I read an article recently about annuity fees.  It spoke about most clients thinking that there are fees and that annuities are expensive.  In fact, that couldn’t be farther from the truth.  You will never find a fee on Indexed Annuities themselves, with the exception of GLWB’s of course.  That’s an income rider that guarantees an income to the annuitant for the rest of their lives. The perception that there are fees and that annuities are expensive was probably born out of Variable Annuity customers.  VA’s are the most fee-heavy annuity contracts sold to date.  The typical VA has charges close to 4.5% all together. Those charges are: Administrative Service Charge, Contract Maintenance Charge, Mortality & Expense Risk Charge, Underlying Fund Expenses and optional rider fees. They say that Indexed Annuities are complicated?  Indexed Annuities don’t have prospectuses and they don’t have fees, period.