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Whether you
want to finance the retirement of your dreams, maintain financial
independence as you age, transfer wealth to your heirs or build a
financial reserve, a fixed annuity may help you obtain your goals.
Why a Fixed
Annuity?
A fixed annuity can be an
important financial tool for your retirement plans. Here's why:
Benefits of an
Annuity
Annuities are an
excellent tool to help you plan for your financial security. They offer a variety of benefits including tax-deferred
growth, ability to avoid probate, and lifetime income.
Tax-Deferred Growth
Tax-deferred growth
allows your money to grow faster because you earn interest on dollars
that would otherwise be paid as taxes. Your principal earns interest,
the interest compounds within the contract, and the money you would have
paid in taxes earns interest - in effect, triple compounding.
For individual
purchasers, income taxes on the earnings in a fixed annuity are not
payable until the money is withdrawn - you control when taxes are paid.
Avoid Probate With A
Named Beneficiary
Annuities offer the ability to name a
beneficiary in a contractual agreement, which may minimize the expense, delays, and publicity
that comes with probate. Your named beneficiary may receive death
proceeds as either a lump sum or monthly income. Any death benefit will
be paid directly to your designated beneficiary, without the publicity,
delays and costs of probate. (All annuities are insurance contracts,
as opposed to other financial arrangements, like CD's. Since CD's
are not contracts, naming a beneficiary is not going to avoid probate -
please check with your attorney for the specific rules in your state)
Competitive interest rate guarantees
Annuities have generally been
extremely competitive with interest rates of other financial products
for long-term savings.
Lifetime Income
Annuities offer lifetime income
guarantees upon annuitization - assurances not found in other financial
products.
You can receive a guaranteed income
stream with the purchase of a tax-deferred annuity. You have the ability
to choose from several different income options, including lifetime or a
specific period. With non-qualified plans (non IRA, 401k, 403b, etc.), a
portion of each income payment represents a return of premium that is
not taxable, reducing your tax liabilities.
We understand that, depending on your
individual situation, you need the ability to choose whatever type of
annuity fits you best - you have the ability to choose from several
variations:
-
Traditional Fixed Annuity
– Offers a declared fixed
interest rate that is guaranteed for a specific period and
guaranteed to never go below a specific percentage.
-
Equity Index Annuity
– Interest rate credited to your annuity contract is linked to
specific market indices (S&P 500, Dow Jones Industrial Average, etc.
– depending on the plan) that you can choose on an annual basis.
Once the interest is credited you are guaranteed that it can never
go down based on future market fluctuations - upside potential with
NO market risk.
-
Immediate Annuity
– You are guaranteed an income stream ranging from a specific period
of time to your entire life. An immediate annuity offers a solution
to the problem of outliving your money.
Security
The stock market
may go down or Interest rates may drop. Your fixed deferred annuity
interest rates will never fall below their guaranteed minimum. With a
fixed, deferred equity-indexed annuity your original principal will not
decline in a falling market. The same principal guarantees do not exist
with a variable annuity, since you incur the risk.
Favorable withdrawal provisions
Many annuities allow up to 10
percent of the value of the contract to be withdrawn without surrender
charges. Tax penalties may apply depending upon the age of the contract
holder. (Generally, a 10 percent tax federal penalty applies to
withdrawals prior to age 59½.)
Protection of
your Principal
Annuities are
one of the few tax-advantaged investment alternatives that generally
guarantee the return of your principal. By law, insurance carriers
are required to retain 100% of your premium deposit in reserve. A bank,
on the other hand, is only required to retain 1.5% of your deposit in
reserve, while the rest is lent out or invested. Your principal is guaranteed by
the issuing insurance carrier and in most states, by the state guaranty
association. In North Carolina, for example, the state guaranty
association provides safety net protection of up to $300,000. per
fixed annuity contract (NOT variable contracts) - even in the unlikely event that an insurance company
would become insolvent.
No up-front sales charges
Sales charges do not reduce the
account value on which interest is credited, except in the form of
surrender charges on early withdrawals.
Triple
Compounding
Your premium
earns interest, the interest earns interest, and the money you save by
deferring tax payments earns interest.
Maximize Your
IRA or 401k
An annuity can
be set up as a “Stretch IRA”, also known as a multi- generational IRA,
which can pass assets in your IRA down to your family and minimize their
potential tax liability, while maximizing the payout value of your IRA.
Inheriting an IRA can cause substantial tax problems for your heirs,
since the total amount is taxable.
Receiving the
payment in a lump sum or even over 5 years can be potentially
devastating. The IRS allows for distributions to be spread over the life
expectancy of your beneficiary or beneficiaries, if set up properly.
However, even though it is allowable to do so, many institutions will
not allow this type of distribution. We specialize in this type of
distribution and can help you find the right IRA custodian to accomplish
this.
Annuity plans
offer a wide range of initial contributions, ways of crediting your
interest and payout options. You pay no commission out of your
initial deposit when you buy a fixed
annuity, so all of your money goes to work for you immediately.
Whether you are looking for long-term growth or for immediate income,
you can probably find an annuity that will help fulfill your goals. How
valuable is an annuity? The chart below illustrates how the tax-deferred
annuity earns you much more over time than the taxable bond or savings
account.
This chart does not take into account
taxes payable upon withdrawal from the annuity. However, even after
paying taxes on a lump sum withdrawal in the above example, you will
still be ahead. (Assuming no increase in the tax rate)
There are
basically, two kinds of fixed annuities:
1.
Tax Deferred Annuities.
You can purchase a deferred annuity with one or more premiums paid to an
insurance company. Your premiums earn interest, which can be calculated
in numerous ways, depending on the plan you buy. You pay tax on the
interest earned only when you withdraw your funds. As with other
investment alternatives such as Certificate of Deposit (CD's), you may
be subject to penalties if you withdraw your funds early.
These penalties
are called surrender charges. The good news is that you can usually
withdraw some percentage, usually 10%, of your funds every year during
the surrender penalty period without paying a penalty. The amount that
you can take out without paying a penalty is called penalty-free
withdrawal. When choosing your annuity, you will have an array of
choices about:
-
how much money you can withdraw
without paying a penalty.
-
how much the penalties will be.
-
how many years it will take for
the penalties to reduce to zero.
(If you withdraw you funds before you
are 59 +, you may be subject to a 10% tax penalty.)
2. Immediate Annuities.
Immediate annuities provide a guaranteed source of income for as long as
you wish - starting whenever you want. You buy an immediate annuity by
paying one premium to an insurance company. The insurance company sends
regular income payments to you or the payee you select. You decide how
often the checks will come, and for how long the payments will be made.
The regular payout amount depends on the type of immediate annuity you
select.
CD vs. Fixed
Deferred Annuity
Which Best Meets Your
Needs?
They're both quality financial tools. If you're debating whether the
best place for your money is a certificate of deposit (CD) or fixed
deferred annuity, the answer depends upon your individual financial
situation and investment objectives. Both CDs and fixed deferred
annuities are savings vehicles used by individuals to accumulate wealth.
However, these two products are quite different; each has its own unique
strengths and uses. For the sake of comparison, let's look at two
similar versions of these products — an individually owned, non-tax
qualified bank CD and an individually owned, non-tax qualified single
premium fixed deferred annuity earning an annually renewable fixed rate
of return.
Objectives
Safety of Principal:
Both CDs and fixed deferred annuities are considered low-risk
investments. CDs are generally issued by banks and, in most cases, are
insured by the Federal Deposit Insurance Corporation (FDIC) for up to
$100,000 per depositor. Should the bank fail, the FDIC guarantees CDs up
to this amount.
Fixed deferred annuities, on the other hand, are
issued by insurance companies and are not insured by the FDIC. They are
backed in their entirety by the financial strength of the issuing
insurance company, regardless of the amount. Additionally,
most states have what is known as a State Guaranty Association. The
purpose of the association is to provide additional “safety net”
coverage to all residents of the state who purchase certain insurance
products.
All insurers licensed to do business in North
Carolina are required by law to be members of the association. In
the unlikely event of an insurance company failure, each owner of a
fixed annuity (not variable) is covered up to $300,000, if the policy
was issued in North Carolina. Before purchasing an annuity however,
you should make sure the issuing insurance company is financially sound.
You can determine financial stability by requesting the findings of
independent rating companies such as A.M. Best, Standard & Poor's,
Moody's and Fitch.
You can check your resident state
guaranty association limits here:
http://www.nolhga.com/stateinformation/main.cfm/location/statelinks
Short-Term Accumulation:
When deciding between a CD and a fixed deferred annuity, your investment
horizon should be a key factor. Your investment horizon is the amount of
time you need to save for a specific goal. For short-term goals, such as
a down payment on a home, a new car or a vacation, a CD may prove to be
a better choice for you. In most instances, you can select a maturity
date for your CD that corresponds to your time horizon. Maturity periods
can be as short as one month or as long as several years.
Long-Term Accumulation:
On the other hand, a fixed deferred annuity is generally the product of
choice for the long haul. Fixed deferred annuities are designed to help
accumulate money for retirement or to protect funds already saved up
once you've reached retirement. They can even be used to provide a
legacy for your heirs. In later years, a fixed deferred annuity also
provides more flexibility for accessing your money.
Interest Return:
CDs offer a guaranteed rate of return for a specified period of time.
Interest rates will vary depending on current market conditions and the
length of time to maturity. Generally, the shorter the period of time to
maturity, the lower the rate. There is no guaranteed minimum for
renewal rates, with a CD. With a fixed deferred annuity, a
guaranteed interest rate is locked in for an initial period, usually one
to three years. After that, interest rates may be adjusted periodically,
generally each year, but never below a guaranteed minimum rate. Because
annuities are long-term vehicles, their interest rates tend to be higher
than comparable CDs.
Fixed deferred annuities also offer a
guaranteed minimum interest rate. Regardless of market conditions,
the annuity will pay at least the minimum guaranteed rate time of
purchase.
Tax Savings:
If taxes are a concern, a fixed deferred annuity may be a better option
for several reasons:
Earnings on CDs are taxable in the year the
interest is earned even if you don't take the money out. With fixed
deferred annuities, on the other hand, earnings accumulate free of
current taxation. Earnings inside an annuity are not treated as
taxable income until they are withdrawn. This allows more of your
money to work harder towards achieving your long-term goals and gives
you a measure of control over when you pay taxes and how much you pay.
This tax deferral feature is one of the greatest advantages of fixed
deferred annuities.
As you can see from the chart below, when saving
for the long term it makes good investment sense to have the power of
tax deferral on your side. Keep in mind that withdrawals from the
earnings portion of a fixed deferred annuity are taxable and, if you're
under age 59 1/2, these earnings may be subject to a 10% tax penalty.
Fixed deferred annuities
may also help reduce or eliminate the taxes on your Social Security
benefits. By leaving your money in a fixed deferred annuity you can
reduce your taxable income, keeping it below the level where you would
begin to owe taxes on your Social Security benefits. But with CDs,
your interest earnings count in the calculation to determine how much of
your Social Security benefits will be taxed — even if you don't withdraw
the earnings. As much as 85% of your Social Security benefits could
end up subject to taxation.
At death, the annuity's account value will be
paid directly to your named beneficiary or beneficiaries, avoiding the
costs and delays associated with the probate process. This is not
the case with a CD, which may be subject to probate. Please note,
however, that both annuities and CDs are taxable as part of your estate
and that the annuity's earnings are still subject to taxation. When
purchasing a fixed deferred annuity, one that distributes the full
account value to beneficiaries is preferable. Some companies apply
surrender charges on death benefit proceeds.
Liquidity:
If you need access to the funds in a CD prior to the maturity date, you
may pay an interest penalty ranging from 30 days' to six months'
interest. Of course, you can limit your exposure to surrender penalties
by investing in several CDs with staggered maturity dates.
A fixed deferred annuity also provides you
with access to funds should the need arise. Most companies will give
you the flexibility to withdraw a portion of your fixed deferred
annuity's account value, usually 10% each year, without a
company-imposed surrender charge. Withdrawals from fixed deferred
annuities can be made in response to a one time cash need or set up
systematically to respond to a continuous need. In fact, most fixed
deferred annuities offer the opportunity to systematically withdraw
funds on a monthly, quarterly, semi-annual or annual basis.
Keep in mind that fixed deferred annuities are
designed to build your retirement nest egg. Withdrawals of earnings
prior to age 59 1/2 may be subject to a 10% penalty tax. Plus, most
insurers assess a surrender charge if the contract is terminated during
the first several years.
Distribution Options at
Maturity: When a CD reaches its
maturity, you can take the CD's lump sum value in cash, renew the CD for
the same or different maturity period or examine other investment
alternatives (such as a fixed deferred annuity).
In a fixed deferred annuity you may elect to
withdraw your money in a lump sum or you may want to select a lifetime
income option, which will provide you with a consistent flow of income
that you cannot outlive. Or, you can simply elect to let your funds
accumulate until a need arises.
These are just a few of the factors to consider
when making your selection between a CD and a fixed deferred annuity.
Depending upon your investment horizon, you may want to allocate a
portion of funds to a CD to cover short-term needs and a portion to a
fixed deferred annuity for the long term.
Consultation
At no charge to you, a representative — professionally trained and
experienced — can help you analyze your needs and recommend appropriate
solutions through insurance and financial products and concepts.
Please Contact:
Although we believe
the above annuity information to be correct, we do not give any tax or legal
advice. Please consult the appropriate legal or tax professional
for advice regarding your specific situation.
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