TYPES OF ANNUITIES

Immediate Annuities
Fixed Annuities
Fixed Indexed Annuities
Variable Annuities

In an immediate annuity, the contract is purchased with a single lump-sum payment and in exchange, pays a guaranteed income that typically starts within 30 days.

Translation

You’re basically exchanging control of your money for a guaranteed stream of income.

Pros of Immediate Annuities

  • Guaranteed income
  • Simple concept
  • Pension alternative
  • Generally gives a higher payout than other annuities
  • No fees for this type of annuity

Cons of Immediate Annuities

  • Inflexible and irreversible
  • No growth opportunities
  • Typically no inflation protection

Immediate Annuities Are Best For:

  • Pension replacement
  • Immediate income needs
  • Estate distribution – control how your money is given to your beneficiaries

In an fixed annuity, the insurance company agrees to pay you no less than a specified rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified percentage per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

Translation

Similar to a CD in that there is a defined term and interest rate. However, the fixed annuity has historically paid higher rates than the CD.

Pros of Fixed Annuities

  • Nobody has ever lost their principal in a fixed annuity*
  • Historically higher interest rates than CDs
  • Tax-deferred growth
  • Optional guaranteed lifetime income
  • Principal and growth available at term’s end
  • Full accumulation at death
  • Probate avoidance
  • No fees for this type of annuity

*In rare cases where insurance companies fail, new insurance companies that have taken over have fulfilled all original obligations for policyholders

Cons of Fixed Annuities

  • Limited annual liquidity, typically 10%
  • No market growth opportunity
  • Early withdrawal penalties
  • Limited opportunity for increase in income to fight inflation

Fixed Annuities Are Best For:

  • Wealth preservation/transfer
  • CD alternative
  • Conservative investors

In a fixed indexed annuity, the insurance company credits you with a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index. Indexed annuity contracts also provide that the contract value will be no less than a specified minimum, regardless of index performance.

Translation

Your principal is linked to the market, which provides opportunity for higher returns but protects your money from any market downside.

Pros of Fixed Indexed Annuities

  • Higher growth opportunities than many safe-money investments
  • Fees range from 0% – 1.5%
  • Secure growth of up to 5.5% annually for as long as twenty years (as long as you take that growth as income)
  • Cannot lose principal or growth due to market volatility
  • Tax-deferred growth
  • Optional, guaranteed lifetime income
  • Principal and growth available at term’s end in a lump sum withdrawal
  • Full accumulation at death
  • Probate avoidance
  • Disclosure documents are typically 6 pages or fewer (less complication)

Cons of Fixed Indexed Annuities

  • May not always link to indices for full market growth
  • Limited annual liquidity, typically 10%
  • Early withdrawal penalties
  • Participation rates and caps are adjustable

Fixed Indexed Annuities Are Best For:

  • Investors fleeing the market
  • CD alternative
  • Wealth preservation/transfer
  • Pension alternative
  • 401(k) rollover

In a variable annuity, you can choose to invest your purchase payments in a range of investment options (sub-accounts), which are typically mutual funds. The value of your account in a variable annuity will vary depending on the performance of the investment options you have chosen. Variable annuities traditionally have annual fees ranging from 1-4% that are deducted from your account value, regardless of performance.

Translation

Your principal can be invested in the market and at risk for loss, though it is possible to achieve higher returns than other annuities when the market is up.

Pros of Variable Annuities

  • Typically higher opportunity for growth
  • Optional, guaranteed lifetime income
  • Tax-deferred growth
  • Full accumulation at death with optional rider
  • Probate avoidance

Cons of Variable Annuities

  • Money is at risk of loss due to being invested in the market
  • Typically has the highest fees of all annuities
  • Limited annual liquidity, typically 10%
  • Early withdrawal penalties
  • Depending on market volatility, principal and growth may not be available at term’s end in a lump sum withdrawal
  • Prospectus is typically 90-500+ pages (very complex)

Variable Annuities Are Best For:

  • Investors that want to continue to invest in the market, regardless of risk
  • People that have maxed out alternative tax-deferred opportunities
  • Those who are interested in passing on elevated death benefits to beneficiaries (depending on riders selected)
  • Those who are looking for diversification from owning just pure equities