Life Annuity – Yes or No?

A life annuity is a financial arrangement that allows a life insurance company to provide a series of future payments to an annuitant for a certain sum of money. The payment stream based upon the life expectancy of the annuitant is of unknown length but generally guaranteed to continue for a certain number of years.

Also it is possible to have a joint contract so that the payments stop upon the death of the second of two annuitants ( i.e., a joint and last survivor life annuity).

A life annuity can negatively affect an annuitant who dies before recovering his or investment. Such a situation is rememdied or offset, by the increase in income not otherwise available and the normally favorable tax consequences. Thus each annuitant must decide whether to sacrifice use of the money in favour of a greater return. If you need a greater guaranteed income then that is what a life annuity is designed to do.

Life Annuity Facts

A life annuity has a pro and con reputation from both the annuitant’s and the issuer’s viewpoint. Who need income or are financially unskilled. Yet, the annuity is an important financial tool for those.

Potential life annuitants are familiar with the ideas involved with life annuities through knowledge of their own pension plan from a business or government position. Most people believe that the odds are stacked in favor of the issuer, though issuers have grappled with the risk these policies bring.

Life Annuities Cost

From the issuer’s viewpoint, there are many technical factors that determine the cost of an annuity payment from the life expectancy of the annuitant and the yields on investments made. There are expenses (including distribution costs) related to managing the money and risk management cost for the issuer which can balloon if annuitant’s returns are higher.

So Should I Be Looking At A Life Annuity

You should be looking at a life annuity if your age and the prevailing long long term interest rates will guarantee you a superior after tax return. You may be able to generate more income if you actively manage your income but this takes time and expertise. Or perhaps you are just fed up with worrying about the net return and want a life annuity to provide you with a guaranteed income.

There is no easy answer to this life annuity question as we all differ. And often, if there is a large age difference in a marriage, points of view can be very different.

Overall it is necessary to consider all the alternative such as bonds or fixed interest rate deposite along with a life annuity.

An Introduction to Annuities

Those with fixed incomes or living on their retirement savings are often looking for a safe, low risk place to invest their money. They will often turn to annuities, which are sold through insurance companies. Basically, an annuity is a contract between you and the insurance company that provided for tax-deferred earnings.

There are a number of insurance guarantees that come with annuities, including the option to “annuitize,” or turn the principal into a lifetime stream of income. However, the fees are often quite high, and the earnings are taxed as ordinary income, not long-term capital gain.

The FDIC does not insure annuities, even if they are sold through a bank. The safety of your principal depends on the financial strength of the annuity provider. If the company fails, you might have $100,000 of coverage by your state’s guaranty association. But these associations operate under state law, and vary on what they cover and how much they pay.

Fixed-rate annuities

With a fixed-rate annuity, you pay the insurance company a certain amount of money. The insurance company then guarantees you a certain periodic payment for the life of the annuity. This is often a way to se up a lifetime stream of income. The insurance company’s goal is to invest your deposit and make more money than they have promised to pay you.

There are often higher interest rates on annuities than on CDs. But fixed-rate doesn’t mean the same thing for annuities as it does for a CD. With a CD, the rate is fixed for the full term of the CD. Fixed-rate annuities do not have a maturity date. The rate is usually only guaranteed for the first year. The rate will then drop after the guaranteed period, and then be adjusted annually.

There may be penalties charged if you withdraw money during the penalty period. You may have to pay an 8% penalty if you withdraw money during the first year. After that, the penalty is usually decreased by 1% each year.

Annuities have tax-deferred features, so if you withdraw money before the age of 59 ½, you may have to pay a hefty 10% penalty to the IRS. The earnings on annuities are taxed as ordinary income by the IRS no matter how long you have invested.

Variable annuities

Variable annuities offer investors unique features, but they are quite complicated. They combine the elements of life insurance, mutual funds and tax-deferred savings planes. When you invest in a variable annuity, you select from a list of mutual funds to place your investment dollars. Your options may include balanced mutual funds, money market funds and several international funds.

Variable annuities have tax-deferred benefits, and they have income guarantees that you don’t find in other investments. For example, for a fee, your variable annuity will pay a death benefit.

Let’s look at how this works. You invest $100,000 in a variable annuity. In a few years, the value of the mutual funds in your account has fallen to $75,000. If this was a straight mutual fund, your heirs would only receive the $75,000. With this annuity, your beneficiaries are guaranteed the $100,000 if you pass away. If you have opted for the death benefits, the market value of the annuity may be as much as $125,000. Your beneficiaries would receive this amount.

Taxes are imposed in the same manner as for fixed-rate annuities. The earnings are taxed as ordinary income. You do not want to use the annuities inside of your 401(k) or IRA. These plans are built for accumulating money on a tax-deferred basis. You don’t want to pay the higher costs of an annuity when you can invest in a mutual fund that benefits you at less tax expense.

There are instances when variables are a good fit. If you’ve already reached the limit on your other retirement savings vehicles, you might look into a variable annuity. You aren’t limited in the amount you can invest in an annuity. Many allow you to convert your investment to an annual income stream, for a slight fee. The insurance company will guarantee that you will receive income payments for a certain period or for life.

CD-type annuities

A CD annuity is a fixed-rate annuity with a guaranteed rate that matches the penalty period. For example, you buy a five year CD annuity at 4%. If you hold the CD for five years then you will receive the 4% annually. If rates rise, you are already locked in at the lower rate.

Insurance companies developed CD annuities to help prevent insurers from making empty promises to continue to pay a high interest rate after the guaranteed period. Rates were falling, and customers were not getting what they expected. Customers began to pay a penalty to get out of the investment.

There are usually higher interest rates offered on CD annuities than on traditional CDs. The investment is tax-deferred, but if you cash out your five-year CD before the age of 59 ½, you will pay a 10% penalty on the gain to the IRS. Many contracts will allow you to take up to 10% of the balance or up to 100% of the interest annually without any insurance company penalties charged.

The surrender charges for a CD-type annuity are similar to those of fixed-rate annuities. There is no FDIC coverage on the investment. Some CD annuities have escape clauses in which the company penalty is waived if the customer allows the payments to be made over a five-year period or longer.

Annuity Basics

Annuities can be very good things for some of us and a disaster for those of us who have not been made aware of the pitfalls and traps that in turn can easily befall them.

Since most people have or are going to look into annuities as a retirement or and an investment vehicle, make sure it fits into today’s needs and parameters. It has to be right for the times we are in and it needs to be periodically revaluated for tomorrow’s world.

Precautions to be taken when buying annuities:

1. One should not Buy Annuities With Long Surrender Periods:
People are talked into buying an annuity that locks up their money for an excessive period of time with a surrender period that is longer than another comparable annuity with similar interest rates.

2. Do not fall for First Year Bonus Interest Rates:
Some annuity companies offer you a ‘bonus’ or ‘bonus interest rate’ on your first year deposit into an annuity.

3. Understand exclusion rations and the value of a partial 1035 exchange.
This is a rather complicated subject because there are enormous variables in determining how to properly structure your annuity contract from day one so as to maximize the taxable exclusion ratios when and if you decide to take an annuitization income from your annuities in the future.

4. Do not use small companies with questionable financial ratings
An annuity by definition is a contract guaranteed by an insurance company. Annuity consumers sometimes forget this and buy and annuity without factoring the claims paying ability of the insuring company. This does not only apply to the questions of solvency or bankruptcy but to the more subtle effect it might have ones contract. If an annuity company has financial trouble it most likely will not go bankrupt (even though it is a possibility) because of the various government regulatory groups that monitor annuity companies. But what can happen is the annuity company will lower the rates at which it credits interest to your account in order to make up its losses in other areas of its business.

5. Know the guaranteed cover per person per insurance company
One needs to know if an insurance company goes broke what is the guaranteed cover per person per insurance company is available .One should not invest more than that in the fixed or guaranteed annuities and the variable annuities are not covered. Because if they broke then one may get stuck or spread the amount between different insurance companies.

6. Consider the shortest penalty free surrender date
The next thing you have to consider is getting the shortest possible penalty free surrender date term as possible so long as the interest rate is better than any CD.

Lastly and most importantly get the best professional help, one who will always tell you “like it is” even if its sometimes hard to listen too and even harder sometimes to act upon.

Buy Annuity

Annuities allow you to accumulate savings and start receiving the evenly distributed payouts after the accumulation period has passed. There are several things that you need to know when you buy annuity investment vehicles. First of all, before you buy annuity, you should look at the specific rules and requirements of this specific annuity investment. Each insurance company will offer different types of annuities with different laws and rules governing them. What is offered at one insurance company may not be available at another. You will even notice the differences when you buy annuity investments in different states as state laws differ.

If you decided to buy annuity investments you should know the different types of annuities that are available to you. The fixed annuity offers you the opportunity to received regular payouts and earn fixed interest rate on your investment. If you decide to buy annuity and the annuity type is variable, the actual annuity value will depend on the annuity’s investment performance. Variable annuities also offer tax deferment options and death benefits. The indexed annuity lies somewhere in between of the fixed and variable annuities. You can also buy annuity investment that is variable in nature but offers minimum performance interest rate.

So how would you actually buy annuity investments? You will need to buy annuity either directly from an insurance company or with the help of your broker. You may have a wealth manager or your employer’s internment managing partner do this type of investment for you. Depending on the type of annuity you will either have to make a lump payment or may decide to make a series of periodic payments for a number of terms after a certain time period passes by. You will also have to specify when the payouts have to start.

Selling Annuity

Many people who have some type of annuity investments (fixed, variable or indexed) are not aware that selling annuity is actually possible and is commonly done by many investors. There could be many different reasons why you may want to consider selling annuity investments. For example you may have a better investment option that will earn you more money by offering a higher interest rate. You may need more money to invest in something else like purchasing a new house, stating an educational program or changing a career. Many annuities will have a time limitation stating when you can start getting annuity payments and certain fee that you have to pay if you withdraw before that date. Selling annuity is an option that will allow you to limit the withdrawal expense and get access to your annuity funds.

There are many different companies that will offer you a purchase price if you consider selling annuity investments. Since different annuities have different contract provisions, not all annuities can be sold but many have this option. The purchasing company will usually offer you the ability to review your annuity contract to determine f selling annuity is a possible option. If it is, the company will make you a purchase offer to pass the right to annuity or annuity payments to this company.

There are many different ways you can exercise your options for selling annuity investments. For example you may have an option to sell a number of your future annuity payments without actually selling the annuity itself. Or you may select to receive the lump sum payment by selling annuity investment in full. Make sure that you consult with your tax advisor on any tax consequences before selling annuity investments. Most of the annuity investments offer the ability to defer your tax payments and you need to compare the outcomes if you keep your annuity or sell it in the near future.