New and Existing Annuity Owners

People are confused about annuities because the same word is applied to many different types of financial instruments. In this month’s newsletter I’ve put together some information that will end the confusion.

End the Confusion About Annuities

Deferred Annuities are term deposits with insurance companies. They are similar to certificates of deposits at the bank. (Note: Bank deposits are DPSDesposit Protection Scheme (Cap. 581) protected while annuities are guaranteed by the issuing insurance company.)

There are two types of deferred annuities: fixed and variable. Fixed annuities have these features:

Your principal is guaranteed. It will never decline. It could, however, be eroded by surrender charges which could also be called early withdrawal penalties and, of course, by withdrawals you make.
• The insurance company adds interest to your deposit each year (depending on the formula, the interest added could be zero).
• The annuity is for a specific term that you select –generally, the longer the term, the higher the interest.
• You may withdraw percentage of your balance annually without a surrender charge. This is a common feature, and the withdrawal privilege will vary from company to company.

Most deferred fixed annuities offer an initial one-year rate with the rate changing each year. A few companies offer a locked-in rate for the entire period.

Another type of annuity is called a variable annuity. With this type of annuity, rather than receiving interest from the insurance company, your money is invested into stock or bond accounts.

With a variable annuity, you can earn more than a fixed annuity, or you could lose principal, depending on the accounts you select; and if the stock and bond markets rise or fall. Variable annuities are therefore riskier than fixed annuities.

There has been significant growth in purchases of index annuities, a type of deferred fixed annuity. In this type of annuity, your principal is guaranteed like the fixed annuity, but your interest each year is based on increases in a financial index (for example, the S&P 500 index). So, your interest is tied to performance in the index, but you can never lose principal because of the index performance. (You can lose principal due to surrender charges incurred if you make withdrawals prior to the end of the term). Index annuities are generally subject to a lengthy surrender charge period.

In addition, purchasers of an equity index annuity do not get the full rate of return from the corresponding index, as there may be a cap or limited participation for each annuity on the index-linked rate of return.

Further, such annuities generally guarantee that an investor will receive 90% of the premiums paid, plus at least a specified interest rate; thus, if interest is not earned, it is possible to lose money.

Everything discussed up until this point describes the growth phase (called the accumulation phase) of the annuity. The accumulation phase typically interests people saving for retirement or putting money away for the future.

When and how do you get your money out? At the end of the term, you have a few options:
• You can leave the annuity alone and continue to let it grow. Many companies may force you to take withdrawals or annuitize at a specific age.
• You can exchange the annuity to another company that may pay you a higher rate, or offer you a preferable structure. Note that a exchange into another insurance product may result in new or increased surrender charges or higher charges, such as annual fees associated with the new product.

Features and benefits of the new product may have higher costs associated with them, and may not be necessary.
• You can make withdrawals.
• You can annuitize the annuity – trade in your accumulated balance for periodic payments for a specified term of years or life.

The withdrawal phase is called the distribution phase. This phase is of interest to retirees.

What is an immediate annuity?

An immediate annuity has no accumulation phase. You make a deposit with the insurance company and immediately begin receiving payments. These annuities are generally suited for senior investors (age 70 plus) who desire to increase their monthly income.
Has this helped?

Annuities have significant flexibility because of the many types of available, and the various ways that they can be used. If you would like further clarification or greater details, email or call us.

Remember always ask for and carefully read a plan’s program description for complete information, including risks, fees and expenses.
Can An Equity-indexed Annuity Guarantee What You Want?

You can choose from a variety of fixed immediate annuities. Each offers its own advantages. Fixed immediate annuities present a steady income commonly used by people who are not fully participating in the workforce, are about to retire, or have retired.

The money that is invested in a fixed immediate annuity is guaranteed to earn a fixed rate per period during the entire annuitization phase – i.e. during the series of payouts.

For the annuitization period, the two main types of fixed immediate annuities are life annuities and term certain annuities. Life annuities pay a predetermined amount each period until the death of the annuitant. Term certain annuities, on the other hand, pay a predetermined amount each period (usually monthly) until the annuity term ends.

For a life annuity, the amount of the monthly payments depends on the annuitant’s life expectancy. The lower the life expectancy, the higher the payouts will be because more of the annuity investment must be paid out over a shorter period.

For example, if two people, age 60 and 80 respectively, both pay the same premium for an immediate annuity, the 80-year-old will get a larger monthly check as she has a shorter life expectancy.

Straight life annuities are simple. Once the annuitization phase begins, this annuity pays a set amount per period to the annuitant until she dies.
A substandard health annuity is a straight life annuity that may be purchased by someone with a serious health problem. Based on ill health and the lower life expectancy implied, the insurance company will make a larger monthly payment. Strangely, with this type of annuity, ill health is financially beneficial.

Life annuities with a guaranteed term (or term certain) offer a beneficiary option. If the annuitant dies before the guaranteed term has expired, the beneficiary will receive the sum of the money not paid out. Of course, this advantage comes at an additional cost.

A joint life with last survivor annuity continues payments to the annuitant's spouse after the annuitant's death. Longer payouts here may imply higher costs.

Term Certain Annuities pay a given amount per period up to a specified date. If the annuitant dies before then, the insurance company continues payment for the specific term to the beneficiaries.