Annuity Basics
Types of Annuities
Although there are different types of annuities available for different situations, we’re here to help you discover which one may be right for you.
What are the different types of annuities?
When someone gets a set amount of payments on a fixed schedule, that’s an annuity. Similar to a pension, an annuity may provide reliable payments each month or each year. Usually, these payouts happen on a regular basis until you pass away. Then, depending on your annuity contract, there may be death benefits as well. Typically, there are three main categories of annuities available to retirees and pre-retirees.
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First, a fixed annuity is an insurance product that may offer a pre-set interest rate.
After a set number of years, your money may begin to receive that interest rate. Regardless of what's going on in the market, a fixed annuity contract may guarantee* a certain rate every year. The upside is that your insurance company commits to giving you this rate. The downside, however, is that you lose the ability to see additional interest even if rates, in general, are up.
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Second, is a variable
annuity.
For many reasons, these types of annuities may not be suitable for some retirees. For example, if your goal is to keep your retirement savings intact, a variable annuity cannot guarantee this. By definition, this type of annuity puts your money at risk in the market: it is variable. Also, variable annuities may not provide a fixed income you can count on.
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Third, are fixed index annuities (FIAs).
FIAs may offer potential benefits such as: Retirement income you cannot outlive, a reasonable rate of return, over time, and guaranteed* protection of principal (backed by the claims-paying ability of the insurance company)
More About Fixed
Index Annuities
One of our favorite sayings is, “The purpose of your money determines the place for your money.” For example, if your money has the purpose of providing you with income in retirement, you need to know you can count on it. A fixed index annuity (FIA) is a contract with an insurance company. Because of this, an FIA is not an investment. Instead, it is an agreement with an insurance carrier. You put money in, and the insurance company promises to keep it safe*, backed by its claims-paying ability. Of course, some terms apply with each FIA so be sure to contact us to learn more specifics.
2 Phases of an FIA
Each FIA has a period of time in which you allow the insurance company time to grow your money. The name for this is the accumulation phase. Indeed, different types of annuities have different time periods for this phase. Typically the range is somewhere around 5-10 years, but it can vary. In fact, certain FIAs may allow you to withdraw money sooner. Next, the distribution phase kicks in. During this phase, you may take money out of your annuity. The amount you can take out varies, but is typically around 10%.
What about Taxes
Fixed index annuities allow potential growth with tax deferral. Specifically, any money that remains within your annuity is non-taxable until you take it out. At that point, the money becomes taxable income. Therefore, your money may have a chance to be kept safe by the claims-paying ability of the insurance company without immediate taxes. Also, you may be able to take an income after the accumulation phase in a tax-deferred model. Tax implications may vary so be sure to seek appropriate counsel.
An FIA may also be an option for those who are younger than 59 1/2 and suddenly have an early retirement or severance package. If you were to get a lump sum of money from your 401(k) profit-sharing plan, you may be able to roll that into an FIA. Potentially, this could prevent you from paying a large immediate tax bill or penalty. Of course, this is a unique situation so terms may apply. However, we encourage you to reach out to us to see if this scenario may apply to you.
Disclosure & Disclaimer
We are not affiliated with any educational or government agency. This material is for informational purposes only and is not intended to be a solicitation for or offering of any product or investment. We do not provide investment, tax, or legal advice. Always consult with your own qualified advisors regarding your individual situation. Insurance and annuity products are not suitable for everyone. They involve fees and charges, including potential surrender penalties. Optional benefits and riders may involve additional annual costs. Life insurance requires medical and often financial underwriting to qualify. Loans and withdrawals from life insurance policies reduce policy death benefits and cash values, and may cause the policy to lapse or require additional premiums to remain in-force. Annuity withdrawals are subject to ordinary income taxes, and may incur a 10% IRS penalty if taken before age 59½. Product features and availability vary by state. Fixed indexed life insurance and annuities are not direct investments in the stock market or any index. The interest credited may be linked to the performance of an external index, but the contract does not directly participate in any index or equity/fixed interest investments, nor are you buying shares in an index. Crediting is subject to limits set by the issuing company, such as caps, spreads, and participation rates. Long-term care riders on insurance or annuity products are not a replacement for traditional long-term care insurance. Guarantees are backed solely by the financial strength and claims-paying ability of the issuing company. The offer and sale of insurance products may only occur in states where the agent is licensed and the product is approved for sale. Investment advice relating to securities may only be provided by a properly licensed individual through a licensed affiliate entity, unless otherwise exempt. Comments about past performance should not be construed as a guarantee or assurance of future results. This website may include concepts with legal, accounting, and tax implications. We do not provide specific legal or tax advice, nor do we promote, market, or recommend any tax plan or arrangement. Consult a qualified professional for guidance. No representation is made as to the accuracy or completeness of the information provided here or through any external links. Visiting this website does not create an agent-client relationship.
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