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Beneficial Annuity Investment Tips

Undoubtedly annuities are an investment that attracts the season investor, yet there are some tips that an individual would consider when purchasing an annuity. Unlike bank savings accounts, annuities are not traditional savings investments that you would make at your neighborhood bank. Annuities are tax-deferred investments that are contacts that are sold and issued by insurance companies. When you purchase the annuities you pay for the promise of repayment beginning at a specific date and usually lasting for a particular period of time. Consider the following tips before getting an annuity:

Which Kind of Annuity Will Work for You?

There are several types of annuities that are offered by insurance companies that all have specific features. Annuities can provide either a predictable income stream and deferred tax growth. There are fixed-annuities, variable annuities, and indexed annuities. Fixed annuities can provide an investor a rate of return that is fixed for any number of years. A variable annuity can have the probability of increasing in value at considerably higher rates. However, it also has the ability to slip in below the rates of fixed annuities. The overall rate strictly depends on the performance of each of the mutual funds within the annuity.

The More Annuities the Better

Consider working with an annuity agent that can provide you with a number of different annuities from a number of different insurance companies. This will help you determine the best possible annuity that works for you. An agent who works with multiple companies may have a better idea of which one works for your particular needs. It addition, it is also helpful to know if the agent is an independent one, that is, he doesn’t have ties to one particular company. You should also understand the agent’s commission structure. What is he or she getting from the deal? Your agent knows that best practices in business, requires a higher level of transparency.

You should understand what you fees are: If you work with an agent, he or she should be able to spell out for you any fees, monthly or quarterly frees. In addition, each kind of annuity may have their own type of fees associated with it. Find out, exactly, what kind of fees the annuity has, including early penalties, transfer, or administrative fees. For example, an agent will have “surrender fees” which can put you a tough decision when you are interested in switching agents or annuity providers. Often times, these fees drop off or decrease as the years go by. Find out how the percentage the fees decrease per year.
Understand the health of the company that you are “investing” in. Since annuities are not backed up by the FDIC like other banking or saving instruments. The level of risk the investor has depends largely on two factors: the annuity itself (and its subsequent reinvestments in the market or other mutual funds) and the health of the company issuing the annuity. Every insurance company who issues an annuity has a rating. Your agent should be able to tell you what those ratings are.

Stay Involved with Your Money

The truth is that the best investors are engaged with their funds. Opening an account and putting it on “autopilot” is never the best way to manage your funds. As with any investment, their will be risks and changes. Yet, an investor should always read the prospectus and the quarterly reports to the annuities he or she has.

The Basics of Retirement

Retirement is always closer than it seems. If you are thinking about retirement, then depending on your Social Security check as your primary source of income might not seem like a happy thought. The truth is that everyone needs to think beyond Social Security and the way to do that is through building a solid retirement portfolio.

Developing a solid plan depends on a number of factors including your present day income, your age, your current assets, and determining the quality of life you want to have. Aside from your 401ks, 403bs, pensions, life insurance policies, savings, and other financial instruments, a well rounded portfolio includes any number of annuities based on your anticipated financial need. Providing for the needs of a loved one in the event of a death, illness, or unexpected financial hardship should also figure into the equation as well.

In building retirement income, annuities have captured the attention of investors over the years as a safe and proven way to generate income streams – either immediately or at a later date that is determined by the investor. Annuities can provide the investor the option of placing money in a place where they guarantee receiving tax free growth every year or until the funds in the annuity account are withdrawn. A widely used investment by both young and old, annuities are contracts that promises to make periodic payments to the investor for an established amount of time and at a particular rate of interest. This level of predictability helps calm fears of market up or down swings.

Annuities make for worthwhile investments because they offer tax-deferred growth. In addition, when you finally do pay taxes, you may be in a lower tax bracket. Therefore, one the whole, annuities make it simple to create retirement income streams as they provide for accumulated assets to grow without getting taxed on that growth prior to making a withdrawal.

There are various types of annuities that can strengthen your retirement portfolio. Fixed, variable, and index annuities all provide unique features that can be appealing to the investor. Creating retirement income through various annuity accounts can create various streams of periodic paychecks that the investor knows will be there for a particular time period. In addition, unlike some other saving vehicles, some annuities allow for added security when the investor dies, as the remaining payments can be passed to a beneficiary.

A retirement portfolio with several annuities can all have various distribution or pay days that can supplement other investments the investor has made. With the predictable fluctuations in the market, fixed annuities generate the attention of frugal investors who would like to foresee a steady and dependable rate of return. Yet, the investor less averse to risk can also increase his growth by investing in variable or indexed annuities which are often tied to the performance of either a group of stocks or the overall market. Either way, annuities offer an investor some very good benefits and the ability to diversify his or her investment options that also provide deferred tax benefits. Generating several streams of income for retirement and to last for as long as you live can help you maintain a comfortable standard of living for you and your family.

Common Annuity Shopper Questions

Annuities can provide an excellent investment opportunity for a variety of investors, both big and small. Yet, first time annuity shoppers can have any number of essential questions that should be answered before purchasing an annuity.

What is an Annuity?

An annuity is a contract that is purchased and made between the investor and usually an insurance company for a promise to repay that money in the future, beginning at a specific and predetermined date and for a specific period of time. The investor can deposit funds into that account, during what is known as the accumulation phase, of which that account can grow at predetermined rate; or at a variable or indexed rate. Annuities can defer taxes on the growth of that account until the investors chooses to make a withdrawal many years later.

What is the Difference Between an Annuity and CD?

Fixed rate annuities and Certificates of Deposits (CDs) are often compared because they both offer a “fixed” rate of return which is predictable and predetermined for a specific period of time. The difference really stops there. Annuities are a much deeper or “richer” investment tools and can provide any number of benefits which are not offered by a CD. Fixed rate annuities can provide a higher level of return through higher fixed interest rates, as well as provide a viable tax shelter for any growth that would occur in the account until it has matured. Any growth on that CD account would be taxed every year. In addition, annuities can also provide a fixed stream of income payment to the investor depending on his level of financial need. Offered by banking institutions, CDs are backed by the FDIC. Annuities however remain as solvent as the issuing insurance company though the industry and independent states offer various investor protections.

What Benefits do I get from an Annuity?

Annuities provide the benefits of tax free growth, deferred income streams, and flexibility with vested funds by which to invest in that caters to the investor’s aversion and tolerance to risk based on his age and financial needs. There are various annuities that may appeal to each investor differently. For example, a fixed annuity can provide a predictable level of growth, say at 4% per year, whereas an indexed annuity can provide growth that generally pegged to the overall market in general. Variable annuities can allow the investor to place his or her money in several mutual funds, which can weighted to the investor’s comfort and balance of growth.

Are there Penalties for Withdrawing Funds from an Annuity?

As investment instruments, annuities provide tax free growth and defer tax on income until the investor makes his or her first withdraw. If an investor over the age of 59.5 withdraws funds, he or she will not incur any early withdraw penalties. However, investors who are younger than 59.5 years of age and takes money of their account will be subjected to a 10% penalty and have to pay taxes on any growth in that money.

Is My Money Safe in an Annuity?

Annuities are safe and stable investments offered by insurance companies. Like any investment there is always a level of risk, but annuities have maintained a strong reputation for stability and low risk instruments. Unlike a traditional bank savings account, an annuity is not backed by the FDIC as annuities are issued by insurance companies and not banks. To assist with risk management, many states have their own “back up” organizations that can step in and help the investor if it was necessary. In addition, the industry recognizes the risk for investors and has set a precedence that other insurance companies would buy up the contracts from an insolvent company, if necessary.

Should I Buy a CD or an Annuity?

Comparisons are often made between annuities and Certificates of Deposits (CDs). Yet there are stark differences between the two, which can have a profound impact on the investor’s finances. A CD is issued by a banking institution or credit union whereas an annuity is issued by an insurance company. A certificate of deposit allows the investor to invest their money at a fixed rate of interest for a particular period of time, for example, between six months and 10 years.

The money deposited in the CD can accumulate at a fixed rate of interest for the life of the CD and compounded on a daily basis. The money earned over the course of the year is perceived as income and is taxed at the investor’s current tax bracket. Depending on the banking institution there are varying degrees of penalties for an early withdrawal, but they are usually minimal. Some banks, for example, will subtract a month’s interest earned for an early withdrawal. Once the CD has reached its maturity date, a CD can then be either withdrawn or reinvested into another CD for a particular period of time. There are no age restrictions for withdrawing money from a CD, either before or after its maturity.

An annuity is a financial vehicle and contract that promises to make payments to the investor periodically, for a predetermined amount of time; it is often sold or backed by an insurance company. CDs are specifically compared to “fixed” rate annuities, as fixed annuities are also established for a specific period of time, in which they are set to grow at a “fixed” rate of interest. There are, of course, a variety of annuities that exist, such as variable or indexed annuities that do not provide a fixed rate of income.

The differences really stop there as annuities can deliver an often higher rate of return to their owner when compared against the rates of CDs or similar savings vehicles, such as money market accounts. With fixed annuities, we find other important groups that require some understanding. For example, “immediate” or “deferred” fixed annuities are viable options here as well. The “immediate” group provides a “fixed” payout which is established on the actual amount of the initial investment depending on the age of the investor.

With the predictable fluctuations in the market, fixed annuities have attracted the attention of many investors due to their level of stability. Fixed “deferred” annuities are investments vehicles that grow at a fixed rate, but defer or “put off” taxes that is earned on that growth until the investor is ready to make a withdrawal. Say, for example, a 40 year old man, just inherited $200,000 from his father. If he put that money in a deferred annuity, say for twenty years, he would be able to grow that account and not be taxed on that growth until he makes the very first withdrawal. In the mean time, each year, the annuity would grow about 3% a year – essentially tax-free. This allows the 40 year old man to essentially earn a future income without receiving a 1099 every year.

The predictability of performance and their ability to protect against taxation make fixed annuities make them particularly attractive to anyone’s retirement income portfolio. CD accounts issued by a bank or credit union are back by the FDIC. Annuities, issued by insurance companies, are not backed by the federal government. Though risk is always a factor to be considered, fixed annuities are often backed by the state group. In addition, other insurance companies would step in to buy the annuities from the company moving into insolvency.

What are the Benefits of Annuities?

There is no doubt that, over the years, annuities have had their critics. “Too expensive;” “Too inflexible;” “Too illiquid;” are among the criticisms that planners and pundits have laid on a financial product that has helped usher millions of people into a safe and secure retirement. While annuities do have expenses, and they do have restrictions regarding access to funds, the only way to truly weigh their potential negative impact is to fully examine the benefits of owning annuities.

Deferred Taxation of Earnings

Next to market risk and inflation risk, taxation risk has the greatest impact on wealth accumulation over the long term. The ability to defer taxes on annuity earnings translates into an automatic doubling of returns for people whose combine state and federal taxes put them in the 50% bracket. For instance, if an annuity and an equivalent taxable vehicle both returned 4%, the taxable vehicle would net out at a 2% return after taxes are paid. The benefits of tax deferral diminish for people in lower tax brackets, however, when state and federal brackets are combined a person in the 25% federal tax bracket could still benefit over the long term. Annuity earnings are eventually taxed as ordinary income when they are withdrawn.

Predictable and Stable Outcomes

Even for people with higher risk tolerances, annuities can add the predictability and stability that all investment portfolios need for proper balance and diversification. While future rates of return on annuities cannot be predicted, all annuity contracts include minimum rate guarantees (most variable contracts include a minimum rate guarantee as an option) on the accumulation account. In the distribution phase, most annuities include a minimum income guarantee (an option for variable contracts). With these guarantees, annuities can form the safety foundation upon which more risk-oriented investments can be built.

Sleep Insurance

In addition to minimum rate guarantees, annuities include principle guarantees that ensure either investors or their heirs will never get back less than what they put in (less any withdrawals made). Most annuities provide principle protection in the form of a death benefit, and many annuities also include provisions or options that protect the gains as well. Such guarantees are only as secure as the assets that back them, and life insurers must follow strict state-imposed requirements to ensure that they have sufficient assets to pay out all annuity claims. Life insurers who meet the highest standards set by independent rating agencies are awarded high ratings that reflect their ability to meet their obligations in the worst of economic conditions.

Competitive Returns -

Whether you are totally risk adverse, risk tolerant, or somewhere in between, the various annuity formats offer the opportunity to earn competitive returns commensurate with the amount of risk you are willing to assume. Fixed annuity rates are comparable to bank CDs for people with no tolerance for risk. Variable annuities offer risk tolerant investors the opportunity to invest in stock and bond portfolios that mirror the returns of mutual funds. And, indexed annuities offer risk adverse investors the opportunity to participate in the gains of stock indexes while protecting their principle against the losses.

Access to Funds

Perhaps the greatest reluctance that older investors have expressed over annuities is their “inflexibility” or “illiquidity”. While it is true that annuities require a long term commitment, all annuity contracts contain withdrawal provisions that provide investors with access to their funds. Generally, annuity investors can withdraw up to 10% of their annuity balance without any charges, and, if older than 59 ½, they needn’t concern themselves with the 10% IRS penalty for early withdrawals.

Annuity investors who want access to their funds due have to contend with surrender fees if their withdrawals exceed 10% and they occur during the surrender period. While the fees do start out fairly high (7 to 12%), they decrease by a percentage point each year of the surrender period until they disappear. For investors over 59 ½ who have held their funds through the surrender period, their annuities become are more liquid that termed bank CDs.

Finally, if an annuity fails to meet investors’ expectations, they have the option of transferring their funds to another annuity without incurring taxes. However, if a transfer occurs during the surrender period, it will be subject to a surrender fee.

Guaranteed Lifetime Income

As the new reality of longer life expectancy and retirement plan shortfalls grows among pre-retirees, the concern over income longevity becomes more paramount. Annuities came into existence as a means to provide individuals with a guaranteed stream of income that they cannot outlive. Today’s annuity products provide enhanced security by guaranteeing a minimum income (minimum income guarantees are an option in variable contracts), and, as an option protecting that income against increases in the cost of living.


Yes, there are expenses associated with annuities. And, there are some restrictions on access to funds. However, each investor needs to weigh those costs against the many benefits of annuities in the context of their individual needs and concerns. As with any investment, they are not for suitable for everybody. But for investors looking for tax advantages and some predictability and stability for all or even a small portion of their investment portfolio, in most cases, the benefits of annuities far outstrip their costs.