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Understanding Annuities

Click here to see the Real Benefit of Indexed Annuities

Protecting principal, while having potential for upside growth, is the major benefit of a Fixed Indexed Annuity. Click here to see a comparative rate study of CDs and Indexed Annuities

          Why a Fixed-Indexed Annuity?
Safety * Principal Protection * Lifetime Income                                                                                                                   

        ✔ Fixed Indexed Annuities (FIA's)
      Provide Safety from market downturn

         ✔ FIA’s Offer Principal Protection

        ✔ FIA’s Provide Guaranteed Lifetime Income

Annuities are financial vehicles based on a contract with an insurance company. They grow tax deferred thereby increasing performance and providing predictable growth for retirement income distribution. Fixed Annuities also provide protection against the downside risks of market performance associated with stocks, bonds and mutual funds. Because of these attributes, Annuities are frequently used for retirement income planning and offer a very competitive option and advantage to funds held in Certificates of Deposit (CD’s), Savings Accounts or Money Market funds. 

Use this link: Facts about Fixed Annuities to learn more about Annuities.  Participate by clicking the arrow (>) key at the bottom left of the screen during the presentation.

Our solutions match the best available Annuity products with the special needs and circumstances of each client. Please call us at 513-752-2393 for more information.

The purpose of an Annuity is to help you keep your financial "water bucket" filled for secure retirement income. A Fixed Annuity protects the principal (water in the bucket) from leaks (market risks) while adding a steady stream of interest income to your Annuity by contract with an insurance company.

                                    

Your financial water bucket for retirement continues to increase with a steady stream of interest income that compounds without taxation until you start taking income (water) out of the bucket. Your Annuity also gives you the opportunity in performing like a pension to take a continuous and predictable stream of retirement income for your lifetime, and the lifetime of your spouse, while the residual principal that may remain after your passing will be left for your beneficiaries. 

In addition to the feature that allows an Annuity to perform like a pension, it may also be used like a financial investment to accumulate wealth with deferred taxation. At the end of the contractual surrender period the accumulated gain may be transferred into another Annuity without taxation by a 1035 exchange. It may also be liquidated or used for a different financial investment. In which case, taxable gains may factor into your decision.

Contact us to see how an Annuity can help setup your retirement income for life for both you and your spouse.

Understanding Annuities 101

Annuities may be Immediate, Deferred, Fixed, Fixed Indexed or Variable. It is important to understand how these Annuities differ, as well as the fees and potential surrender charges associated with Annuities. It is also important to be aware of the financial strength of the insurance company. These matters we explain as independent advisors matching the best products available for your particular needs and circumstances.

Annuities also provide Income Riders that provide predictable income that you cannot outlive. This benefit takes the guess work out of retirement income planning. In addition, Annuities will allow you to avoid probate by passing the contract value directly to your heirs. Annuities can be designed to pass that value as a lump sum payout or as a stream of income to your beneficiaries.

The Immediate Annuity will give you income for life, either for a single individual, or “Joint and Survivor,” for a married couple. You give the insurance company a lump sum of money and they provide you an income stream for life or a “period certain” of time such as 10, 15 or 20 years. The “period certain” will provide an income stream to your beneficiary until the end of that period should you die before the end of the “period certain,” otherwise the income will continue for your lifetime. Actuarial tables are used to calculate the payout based on current and projected interest rates and age of the applicant or annuitant.

A Deferred Annuity will use that same sum of money and allow an accumulation in value for a certain period before the income stream is turned on, usually 5 to 10 years. This waiting period allows for a greater accumulation by reason of compounding interest without taxation. When an Annuitant, or person who owns the Annuity, decides to turn on the income stream that is called Annuitization.

A Fixed Annuity adds interest to the account at a given rate and allows up to 10% free withdrawal annually, meaning that you could start taking up to $10,000 per year immediately from a $100,000 Annuity without incurring surrender charges. All Annuities, except Immediate Annuities, have surrender charges that usually decline over a given period of time usually from 3 to 10 years. Those charges vary but typically start around 8% and decline annually to about 2% and finally 0%. The purpose of the surrender charge is to encourage the owner of the Annuity to allow the insurance company to keep control of the money in order to recover their upfront expenses in the sale of the Annuity and to make some profit in a meaningful time frame from investing. There is no death benefit “per se” in most Annuities but the designated beneficiary is able to continue to take withdrawals or a lump sum if the owner dies before Annuitization, or in the alternative the beneficiary may walk away and take the remaining lump sum or value of the Annuity at the end of the contract. Among the best rates currently for a Fixed Annuity are 3.15% for a five year Annuity and 3.35% for a six year Annuity. Please contact us for quotes for different time periods.

A Fixed Indexed Annuity (FIA) will increase in value with the upside movement of a market index but will not decrease in value with a market index downturn . This unique safety feature of a FIA provides greater security for capital preservation and retirement income planning.

A FIA is tied to a “bench mark” such as the S&P 500 or DJIA for the purpose of crediting interest to the account when the index goes up in value. These interest credits usually have caps so that if the market is up 13% at the end of a marking period such as a one year or two year period, you will be credited the cap which can be anywhere from 4.30% to 12.30%. If the market is down there is no loss of principal and your account value will not decrease and some carriers will guarantee a floor of 1% or 2% increase in value even in down years. Carriers also allow for moving account funds back and forth between equity indexed accounts and fixed interest bearing accounts on contract anniversary dates. Protecting principal, while having potential for upside growth, is the major benefit of a Fixed Indexed Annuity. Click Here to see the real benefits of a Fixed Indexed Annuity.

Variable Annuities

Variable Annuities are insurance contracts that allow mutual-fund-like investments, or market related investments, to be wrapped in a tax deferred financial vehicle.  Like Fixed Indexed Annuities, they may provide income riders for a predictable income stream in the future.  Unlike Fixed Indexed or Fixed Annuities, the underlying contract value of a Variable Annuity may decrease with market or investment related declines. Typically, these Annuities also have surrender charges and are subject to a penalty for withdrawals before age 59 ½. However, unlike IRAs there is no required minimum distribution at age 70 ½ unless they are held within a qualified retirement account like a 401(k) or IRA account.

Fees for Variable Annuities usually include insurance and administrative fees averaging about 1.5%, investment management fees of about 1% and, if there is an income rider, another 1% fee may be added.  Therefore, investors may be looking at fees of upward to 3.5% or more for additional riders. These riders may be pertaining to the death benefit, inflation adjusted payouts, and/or nursing home care.

Recently a new breed, or stripped-down variety, of Variable Annuity has been introduced to the market substantially reducing fees. These Annuities do not offer riders for income guarantees, etc., and they do not pay sales commissions to insurance agents because they are sold through fee-only advisors.  However, these Annuities still offer a wide array of investment options. 

Another attractive feature of these new low-cost Variable Annuities is the removal of surrender charges allowing for full liquidity.  The investor thereby has the best of both worlds: tax deferral and liquidity.

As an Investment Advisor Representative I recommend the Jefferson National Monument Advisor Variable Annuity because of its low cost of only $20 per month. There are no other administrative, insurance, or rider fees. When wrapped around managed money accounts there is only the fee of the money manager.

This Variable Annuity also provides for a wide variety of investment options without surrender charges and full liquidity. For investors who have maxed out their 401(k)s or IRAs this tax advantaged account will allow for deferral of tax-inefficient, or tax exposed, investments.

Income Riders Provide Predictable Income for Life

An additional feature of a Fixed Indexed Annuity (FIA) includes the availability of an “income rider” that will add anywhere from 5% to 10% per year to an “income based account.” This account is separate from the value of the “contract account.”

The "income based account" is established for the purpose of generating an “income for life” distribution and generates more monthly income if withdrawals are deferred. Illustrations usually show a deferral in withdrawal up to 10 years because the “income based account” benefits from a growth rate guaranteed by the insurance company of somewhere between 5% and 10% per year, thereby substantially increasing the amount of "income for life" that the Annuity can then generate from the "income based account." The "income for life" rider may be for either single life or joint life so that the surviving spouse may continue the retirement income payments.

Like Fixed Annuities you may have up to 10% per year in free withdrawals, but you are required to wait for at least one year before taking any withdrawals from a FIA. The amount of income that you can take from the “income based account” on an annual basis is limited to anywhere from 4% to 7% depending on age; for example, age 65-70 at 5% and age 70-74 at 6% annual income distribution would be typical.

There may, or may not be, Income Rider fees associated with a Fixed Indexed Annuity. They can vary from 0.00% up to 1.5% when an Income Rider is utilized. These fees are usually deducted from the “contract account.” The value of the "contract account" is what remains for beneficiaries or to the Annuitant if a decision is made to walk away from the Annuity by taking a lump sum and not turning on an income stream.

Fixed Index Annuities are contracts that may require certain conditions and costs, and surrender charges or other penalties may apply for early withdrawals. Rates or return may be calculated differently than the relevant market index and result in a different return.

Avoid Probate with Several Distribution Options for Beneficiaries

If you stay with the Annuity until the end of your life the beneficiary will receive distribution without the need for probate. Also, the beneficiary may continue to take income on a gradual basis from the “contract account” value or take the entire balance of the “contract value” in a lump sum. Additionally, insurance companies usually offer a “Joint and Survivor Income for Life Rider" on a FIA which allows the surviving spouse to continue the same income amount for the remainder of his or her life even if the contract account balance goes to zero.

( Photo: Grandson's Joseph and John show us how to fill the water bucket, grandson Ben Blake waves the magic wane, and granddaughter Fiona collects for retirement)