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Basic Information You Should Know About Annuities…
WHAT IS AN ANNUITY? |
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 An annuity is a contract between an individual "annuitant" and an insurance company. The annuitant (you) agrees to pay the insurance company a single payment or a series of payments, and the insurance company agrees to pay the annuitant an income, starting immediately or at a later date, for a specified time period. The greatest advantage of an annuity is that the money put into it grows on a tax-deferred basis until you (the annuitant) begins receiving his accumulated fund as an income. That means that one hundred percent of your earnings are reinvested in an annuity and allowed to compound (or grow) without having to pay taxes on earnings.
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| HOW DO ANNUITIES WORK? |
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Annuities are simple contracts. You agree to make a single or a series of payments to an insurance company which the company invests. The insurance company then promises to pay you an income starting on a specific date. Most people elect to begin receiving annuity income when they retire and continue receiving payments for the rest of their life! |
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| WHY AN ANNUITY? |
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Annuitization can work great for all types of people but it works especially well for a long-lived retiree. One way to think about a fixed annuity is as a kind of reverse life insurance policy. Life insurance offers protection against premature death, whereas the annuity contract offers protection for someone who fears out-living a lump sum that they have accumulated.
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One of the greatest advantages of an annuity is that the money you invest in it grows on a tax-deferred basis. Your annuity income is only taxed as normal income when you begin receiving it but no income tax is paid on the portion of the income that represents the money you originally paid in to your annuity. Also, most people receive annuity income after they retire putting them in a lower tax bracket. Thus leaving the annuitant (you) with paying much less tax on your annuity income than on income you earned while working full time.
Another advantage of an annuity is that it protects the nest egg of a retiree from theft. If there are fears of people trying to steal money away from you (or perhaps a relative) in your later years then giving the capital to and insurance company for management maybe a very attractive option. It's sad how many times we read in the news of the elderly being ripped off of all their hard earned life savings. An annuity provides a monthly payout for life, and would eliminate this concern. |
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$10,000 Single Deposit 25%
Income Tax Bracket |
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A $10,000 premium earning 6% interest compounded annually for 30 years grows to $57,435 ($45,576 after tax, if surrendered after 30 years). |
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If you refinanced you lost your current mortgage insurance coverage and must reapply at a higher age. |
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| HOW DO ANNUITIES DIFFER FROM LIFE INSURANCE? |
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 Life insurance pays your family cash benefits when you die. Annuities typically begin paying you an income when you retire and may continue paying you an income for as long as you live. (Most annuities stop paying money when you die but some annuities have an option in which your family can continue to collect can continue paying money even after your death.) |
| THE KEY FEATURES OF ANNUITES |
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LIFETIME INCOME — An annuity can provide you with a guaranteed lifetime income, regardless of how long you live! No other investment instrument provides this guarantee. An annuity is truly unique. |
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TAX-DEFERRED GROWTH — Money invested in an annuity grows on a tax-deferred basis. Your investment profits are taxed only when you begin to receive an income from your annuity. The incredible power of 'compounding' enables your money to grow much faster in a tax-deferred annuity than in a taxed investment, such as a CD or mutual fund. |
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LIQUIDITY (In Case of Emergencies) — Many annuities allow you to withdraw up to 25% of your fund with NO PENALTY if you suffer a serious illness such as a heart attack, cancer, stroke, etc. If you are diagnosed with a terminal illness and likely to die within 12 months, you may be allowed to withdraw your entire fund. |
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NO LIMIT ON CONTRIBUTIONS — Annuities have no cap on the amount you may contribute. This further puts the annuity in a league of its own. Other tax-advantaged investments (such as IRA's) only allow you to contribute a limited amount of money during the year, thus hindering the potential tax deferred growth. |
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DEATH BENEFIT — Many annuities offer your beneficiaries a death benefit equal to the amount of money you've paid into your annuity or its current investment value if you die before you start receiving your income. |
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NO LOAD OR FEES — Unlike many other investments Annuities are generally no-load, no-fee investments. Simply put, this means more of your money is actually invested for you than with investments where your money is used to pay an initial or annual charge. |
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BONUS RATES — Some annuities award investors with bonuses at the end of the annuity's first year in the form of extra interest. This increases your investment by increasing your initial principle on which future interest will be calculated in the years to come. This boost often gives your annuity a sizable increase to the final value of the fund! |
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THE RATE OF RETURN — Rates of return, like any other investment will vary from annuity to annuity and company to company. FamilyInsurance.org's representatives will help you choose a fixed annuity with strong return and a guaranteed rate of return. |
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SURRENDER CHARGES — This will only apply if you withdraw more than 10% of the fund's value during the surrender charge period. This period is typically seven to ten years from the annuity contract date.
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