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Welcome to The Learning Library Articles in this section are designed to give you the increments of knowledge so you may make an informed decision on why a fixed tax deferred annuity may be the very best investment for you. Please scan the following articles until you find what you need: Class 101: Benefits and Features of Fixed
Annuities Tax Deferred Growth In an annuity, your money grows tax-deferred. This allows all your deposits plus the interest earned to grow without being taxed. The compounding effect of this is one of the most powerful financial tools you have at your disposal. Compare the difference in growth between a taxable investment and the same investment in a tax-deferred annuity: Look at the difference a tax-deferred investment can make! Watch Your Money Grow! Tax Reduction You will not get a taxable1099 each year to include in your taxable income and annuity annual interest will not add to your income in figuring your taxable portion of your Social Security benefits like CD interest does and like even some, so called, tax-exempt investments do. With respect to the recent tax revisions on social security tax, reduction is made possible by realignment of municipal bonds and other investments into annuities. With qualified plans, i.e., IRA's, SEP's, Keogh's, you're reducing your pre-taxed income by contributing to the plans in the form of flexible (FPDA) annuities. Earn Competitive Interest Rates. Typically your return will be 1%-2% higher than with certificates of deposit (CD's), but this can vary to less or more spread at times. Liquidity. Unlike CD's most annuity products allow you to withdraw 10% of your present balance each year with no penalties or fees attached. You may request to access your money on any given business day, keeping in mind that the funds will take a few days to obtain. Safety and Security. Your principal and earnings are always guaranteed in a fixed annuity. There is little risk involved. Insurance consumers are protected from financial loss in most cases due to the insolvency of an insurance company through their state guaranty fund. The majority of state guaranty funds cover 100% of your account up to $300,000. (Arizona is $100,000) Estate Advantages. Annuities avoid probate because they are "beneficial" products that allow you to specify your choice of beneficiary. All "owned" assets require transfer by Will, Trust, or special titling requiring survivors in able to avoid probate. No Loads or Sales Charges With fixed annuities, 100% of your money is being invested. Only a handful of companies charge an administration fee, if so, usually around $30 per year. None of the Doctor Annuity contracts offered have any up front sales charges or ongoing administration fees! How do the various annuity bonuses work? Generally, the interest rate given an annuity is guaranteed for a minimum of one year, or calendar year. There are many Annuities with multi-year interest rate guarantees. Most companies have several annuity products with a guaranteed first year bonus, usually the bonus ranges from 1%-10%. This bonus gives the annuity added value the first year, then the rate comes back down to the base rate the following year. Some companies also give annuitization bonuses. They range from 3%-10%. These bonuses are given, provided certain conditions are met, during the annuitization payout phase. Generally, to receive this particular bonus your annuity must be in force for a minimum of five years and your payout must be spread out over a minimum of five years. What is the impact of surrender charges on your choice of annuities? The actual length of the surrender charges are vital in planning out the time frame in which you may desire to start receiving your benefits without penalties. For example: An individual whose age is presently 55, and who would like to retire and start collecting the annuity benefits at 62, or reserve the right to take the money out and spend it or invest elsewhere - would maximize earnings and at the same time avoid any penalties by selecting a 7-year annuity. However, if this same individual purchased an annuity that had a 12-year surrender period, (and maybe a higher bonus), he would not incur a surrender charge to start monthly income, just as long as he does not surrender the contract during the time period. With liberal yearly withdrawal or systematic payout provisions available from most carriers, longer surrender charge periods will not normally affect income as long as the owner does not want to cash in the funds and consume the money and/or buy another investment type. (Why would anyone want to buy a non-deferred taxable investment?) And, it is very possible you can "latter" more than annuity purchase with, for example, one shorter term and one longer term surrender period. The first would pay future income, if partial income needs exist, while letting the other contract continue to grow tax free. Or, another very popular way to "latter" your annuities is to purchase an immediate annuity in the amount you need for immediate retirement income needs, and then allow a second deferred contract to grow. Also, if income needs are not primary, but you want some interest earnings in your mailbox each month, you can have your Doctor Annuity representative design a program with two contracts. The first is again an immediate annuity that pays income right away. The second has just enough principal placed in it so that the projections in future value, based on either a fixed rate or indexed crediting product design, will equal the original amount of total principal invested! This is very popular with our clients! Annuity Pay-Out Options There are three major kinds of annuities that can be purchased and when an individual decides to start taking a distribution, choices will have to be made as to the "Pay-out Options". When do I have to make these decisions? The pay-out option does not need to be declared when you purchase an annuity, whether it is a single premium or a flexible deferred annuity. However, at the point of desiring distributions, you must declare your pay-out option. It is a critical and important decision; the wrong choice could be devastating to your retirement outcome. What are my pay-out option choices? There are quite a few choices and not all carriers have the same pay-out options, but this list is fairly comprehensive. Lump Sum Payout - Like a CD you can purchase an annuity that will pay you the Lump Sum that has accumulated at maturity, but unlike a CD you will also have other options: Life Annuity - The benefits for this option is calculated by using life expectancy charts. Once you decease, all annuity payments stop. If there is any remaining balance in your account, the insurance company keeps it. However, if you outlive your balance, the insurance company keeps paying you until you die. Period Certain Annuity - Here you choose a specific length of time for the distribution of your monthly income payments. The shorter the contract period, the higher the monthly income. Once the contract period has ended the account will be at zero. The typical period certain options are 5 years, 10 years and 20 years. Life Annuity with Period Certain - The company will pay you an income for as long as you live, but if you die before the period certain that you choose, the income will be paid to a survivor you designate until the end of that period. For example: John is 73 years old and is a widower, however, he has a daughter. John opted for Life Annuity with a 20 year Period Certain. He started to receive payments in 1993, he passed away in 1999, six years into his annuitization. His daughter will receive the payments for 14 more years. Joint and Survivor Annuity - The company will pay an income to you during your life, and after your death, the company will pay a percentage of that income (50% or 75%, for example) to a survivor that you have designated at the time of purchase. The monthly income is determined by examining the life expectancy of both you and your spouse. The younger your spouse is the lower the total monthly income. It is very smart to seek professional advice before declaring your specific pay-out option. Also, sometimes it is advantageous to take a lump sum distribution and place the money in another life insurance company that will credit you a higher interest. CLASS 102: WHAT DOES IT COST TO PURCHASE AN ANNUITY?
This is similar to the way many banks operate when you buy a CD. They may pay the teller a commission or a "bonus", but you are never even aware of it. It is a common banking practice. Class 103: Annuities Are Great Vehicles For Your Investment Portfolio Annuities are tax deferred savings vehicles that are produced by life insurance carriers. They come in three basic forms.
Individuals invest billions of dollars yearly into annuities. They provide a wide spectrum of risk tolerances for investors; from fixed interest to equity index with principle guarantees. Tax deferred annuities should be part of your overall investment portfolio. They provide better gains than traditional CD's and yet superior security. Class 104: Annuity Myths vs. Realities As you go through life, you’ve probably noticed lots of things that you always hear are true, but really aren’t. Annuities have been around a long time, and have accumulated more than their fair share of myths. Some used to be true, some were never true. The Myth – Annuities are dull, low risk, low
return types of investments, suitable only for widows, orphans, and junior
accountants. However, new ways of marketing annuities directly to consumers -
over the phone, through the mail and, most recently, over the Internet, have
resulted in “direct-sold” annuities with total costs comparable to no-load
mutual funds. (As long as surrender charges are not invoked) (One disadvantage of annuities is that withdrawals before age 59 1/2 are
subject to penalty on the earnings. However, we use an IRS "Section
72-T" provision to avoid this penalty in some circumstances)
If you’re not focusing on tax issues, you’re ignoring one of the most
important issues in your retirement plan! |
As
a matter of fact ... NOTHING! The insurance company who issues the annuity
pays a commission to the agent. It is not deducted from your investment account,
nor do you pay a fee to the agent. Now, if you leave early, there usually
is a surrender charge which is a deferred sales commission against your
investment money, so always be sure to match your needs with the proper
"term" (time) period to be sure you do not have to pay this deferred
sales charge!