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Paul Thordsen, LUTCF
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Frequently asked quetions about annuities are listed below.
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What is an annuity?
An annuity is an investment contract or policy between you and a life insurance company. Annuities can be a useful tool for retirement planning:
- Save tax-free
Annuities enable you to save money on a tax-deferred basis. You will not pay taxes until you begin to withdraw your money. Unlike a 401(k) or IRA, there are no limits on the amount you can put into an annuity.
- Offers retirement income
You can purchase a contract that provides lifelong income or one that pays you for a specific time. Payments can be monthly, quarterly, semiannually or annually at a designated time.
- Provides benefits to your heirs
Some annuities include an insurance component. If you die before you start to collect on the annuity, it pays your heirs the amount you invested plus interest or the market value of the funds in your account, whichever is more.
- Offers an array of investment options
You determine how much you want to invest in an annuity and the amount of investment risk you are willing to take. If you put your money into a variable annuity, your premiums can be invested in stock or bond funds. There are no tax consequences if market conditions prompt you to change how your balances are invested. You can also change from one fund to another without tax consequences. If you don't want to deal with the ups and downs of the stock market, you can invest your money in a fixed annuity, which would offer you a specific rate of return.
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Why should I consider purchasing an annuity?
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You may need to protect yourself against outliving your assets, even if you have diligently saved for your retirement. Consider the following:
- Retirement plans limit contributions
Employer-sponsored plans such as a 401(k), 403(b) or Keogh are an important part of planning for retirement. However, contributions to these plans are limited.
- Social security and pensions may not be enough
Your social security and pension may provide less than you need to retire. In 2002, the average Social Security check was $876 per month, according to the Social Security Administration and the value of fixed pensions is eroded by inflation.
- Inflation and taxes can eat away at savings
Over time, inflation will make everything you purchase more expensive, so your investment earnings need to keep pace to maintain your current standard of living. Many sources of income may also be taxable such as Social Security, IRA payments, interest earned on CDs and savings accounts. You may end up with a lot less after-tax income that you had been expecting.
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How much money should I invest in an annuity?
The amount of money you should consider putting into an annuity depends on your:
- Current savings and investment portfolio
- Immediate economic needs
- Long-term financial goals
Y ou may need to build retirement savings with a tax-deferred annuity or supplement your retirement savings with an immediate annuity.
Unlike a 401(k) or an IRA, there are no limits on the amount that you can invest in an annuity.
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What are the different types of annuities?
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There are many types of annuities for a variety of different needs and budgets. Your age and risk tolerance should weigh heavily in your decision regarding the type of annuity in which to invest.
When considering an annuity, you will have to decide when you want to receive the money. If you invest in an immediate annuity, you would receive the income now, while a deferred annuity would be a savings vehicle for the future.
- Immediate annuity: You pay the insurer a lump sum of money in exchange for receiving income for a set period of time or for as long as you live. You usually start receiving payments immediately after transferring funds into an annuity.
- Deferred annuity: This is a long-term retirement savings vehicle, which builds savings on a tax-deferred basis.
- You will also need to select how your money will be invested. You can invest your money so that you get a stable rate of return or you can pick an annuity where your money is invested in the stock market. You can pick one or a combination of the following:
- Fixed annuity: This provides a stable, guaranteed rate of return.
- Variable annuity: The annuity is invested in the stock or bond market. As a result, you assume some financial risk in return for a potentially higher economic reward.
Life insurance companies offer many combinations of the above, with a number of special features.
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What is the difference between a fixed and variable annuity?
Fixed annuities pay a "fixed" rate of return. When you receive payments, the monthly payout is a set amount and is guaranteed. Fixed annuities may be a good choice for:
- Conservative investors who value safety and stability.
- Those nearing retirement who want to shelter their assets from the volatility of the stock or bond market.
W ith variable annuities, you can invest in a variety of securities including stock and bond funds. Stock market performance determines the annuity's value and the return you will get from the money you invest. The amount of risk you are willing to assume should influence the kind of funds you select.
You may want to consider a variable annuity if you are:
- Comfortable with fluctuations in the stock market and want your investments to keep pace with inflation over a long period of time.
- Young and want to prepare financially for retirement by reaping the gains in the stock or bond market over the long term.
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What are deferred and immediate annuities?
Deferred Annuity
This type of annuity is good for long-term retirement planning for the following reasons:
- Payments on income taxes are deferred until you withdraw the money.
- Unlike a 401(k) or an IRA, there are no limits on your annual annuity contributions.
- There is a death benefit. If you die before collecting on the annuity, your heirs get the amount you contributed, plus investment earnings, minus whatever cash withdrawals you made.
Immediate Annuity
This allows you to convert a lump sum of money into an annuity so that you can immediately receive income. Payments generally start about a month after you purchase the annuity. This type of annuity offers financial security in the form of income payments for the rest of your life. In other words, you cannot outlive it.
Immediate annuities allow you to:
- Supplement your current income. If you are nearing retirement, you may consider transferring another savings or investment account into an immediate annuity. You can also move the proceeds from a deferred annuity into an immediate annuity.
- Pay taxes only on the portion of your immediate annuity payments that is considered earnings. You are not taxed on the portion that is principal. The principal is the initial deposit made with funds that have already been taxed.
L ike deferred annuities, immediate annuities can be fixed or variable. Fixed immediate annuity income payments are pegged to the amount you contribute, your age and the interest rate at the time of purchase. Those payments to you wil l not go up or down. Variable immediate annuity payments vary with the investments you chose.
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How are annuities sold?
Annuities can be purchased through insurance agents, financial planners, banks and life insurance carriers. However, only life insurance companies issue policies.
Here is a closer look:
Agents
Agents are insurance professionals who are licensed by your state insurance department. Some agents work exclusively for one insurance company, while others represent several.
If you decide to use an insurance agent, find one who is knowledgeable about annuities and has a reputation for excellent customer service. The agent should be able to advise you and answer all your questions. If you are thinking about buying a variable annuity, the agent should also have a license to sell variable annuity products. Since variable annuities are considered securities, you should receive a prospectus describing the investment alternatives available to you.
Banks and brokerage firms
Products developed by life insurance companies are often marketed through banks and stock brokerage firms. Make sure the person who sells you the annuity is a licensed life insurance agent. In the case of a variable annuity, the agent should also be a licensed securities dealer. If you buy an annuity through a bank or brokerage firm, you should ask about the types of annuities the insurer issues and the financial strength of the insurance company.
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How do I select an insurance company?
The annuity business, like the insurance industry itself, is very competitive. There are hundreds of insurers and many different types of products available to you. Before buying an annuity, contact your state insurance department to see whether it offers an annuity buyers guide for your state.
There are four things to consider:
- Insurer's financial strength
You should check the financial stability of the insurance companies you are considering. Several companies provide this information, including:
A.M. Best Company, Inc.
Ambest Road
Oldwick, NJ 08858
(908) 439-2200
www.ambest.com
Moody's Investors Service
99 Church Street
New York, New York 10007
212-553-1658
www.moodys.com
Standard & Poor's Insurance Ratings Service
55 Water Street
New York, New York 10041
212-438-7280
www.standardandpoors.com
Weiss Research
4176 Burns Road
Palm Beach Gardens, Florida 33410
800-289-9222
www.weissratings.com
- State insurance department license to do business
Make sure that the insurer you select is licensed to issue annuities in your state. Ask whether the specific type of annuity you are considering is available in your state.
- Service
Expect excellent customer service. Your insurance company representative should answer your questions promptly and provide useful information that addresses your concerns. This way, you can make a well-informed decision on the annuity that best meets your needs and objectives.
- Choice of investments and riders
Some insurers offer annuities with an array of investment choices and a large variety of riders. Compare these options. Some options may increase the price of the annuity. Decide on an annuity that best meets your needs.
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How do I pick an insurance agent?
Selecting an insurance agent is an important decision. Like picking a doctor or a lawyer, you need to work with people who you are comfortable with and have considerable knowledge about their profession.
Ask your friends, relatives and business associates for names of insurance agents that have an excellent reputation. But, do not stop there. Find out what life insurance carriers they represent. If you are not interested in the companies they represent, you will need to find another agent.
Make sure that the agent:
- Devotes the time needed to understand and serve your annuity needs.
- Demonstrates clear knowledge about the various types of annuities that are available and can plainly explain your choices.
- Has a proven track record of excellent customer service.
- Is licensed by your state insurance department.
F ind out the professional designations he or she has earned such as:
- Chartered Financial Consultant (ChFC)
Contact Information:
The American College
270 S. Bryn Mawr Avenue
Bryn Mawr, PA 19010
Phone: 1-888-AMERCOL (263-7265)
Fax: 610-526-1465
Web site: www.amercoll.edu
- Certified Financial Planner (CFP)
Contact Information:
Certified Financial Planner Board of Standards, Inc.
1670 Broadway, Suite 600
Denver, CO 80202-4809
Phone: 303-830-7500
Fax: 303-860-7388
Web site: www.cfp.net
- Member of the Registry of Financial Planning Practitioners
Contact Information:
The Financial Planning Association
5775 Glenridge Drive, NE,
Suite B-300
Atlanta, GA 30328-5364
Phone: 800-322-4237
Fax: 404-845-3660
Web site: www.fpanet.org
- National Association of Securities Dealers, Inc.
1735 K. Street NW
Washington, DC 20006-1506
202-728-8000
www.nasd.com
Continue to research agents until you have found someone who can help you meet your financial goals and needs.
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What is a "free-look" provision?
Most state insurance departments require insurance companies to provide a "free-look" period after you have purchased the policy. It is typically a 10-day span in which you can pull out of the contract and obtain a refund based on contract terms or state law. You should use this time to review the policy, ask your insurance agent or stockbroker any additional questions and make a final decision as to whether the annuity you selected was right for you.
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How often should I review my annuity portfolio?
You should review your annuity portfolio as often as you would your other investments. Depending on the type of annuity, you should review it at least once a year. Of course, a major change in your family such as a serious illness, a new baby or even starting a business should trigger a call to your insurance agent or company representative to discuss changes in your financial planning. If you change your plans, find out whether this will cost you anything and if so, how much.
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What if I lose my annuity policy?
If you cannot find your annuity policy, there is no need to panic. For starters, most insurers issue quarterly or yearly statements. If you have not received one or need to reach the insurer immediately, contact the agent or financial planner who sold you the annuity. You may also want to review your canceled checks to see where you wrote the check.
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How will I receive my annuity payments?
An important decision in purchasing an annuity is deciding how you want to be paid. You can select annuity payouts for a set period of time or continue for your lifetime. With some options, a beneficiary can be designated to receive payments upon your death. You have several choices including:
Straight life
You will get income for your entire life - even after all the money you put into the annuity has been used up. However, if you die before the money in your account has been used up, nobody, not even your dependents, will collect payouts. The straight life annuity might be right for you if you need to maximize the amount of income you receive and either don't have dependents or are not planning to use the annuity for the purposes of estate planning.
Joint and survivor
This type of annuity pays you as long as you live. After your death, it will pay the joint annuitant for the rest of his or her life. You can choose the benefit your survivor will get upon your death, but this option reduces the payout amount you get.
Refund annuity
This payout option is gaining in popularity. It provides income for life. If, however, you die before you receive an amount equal to all of the premiums you paid, your beneficiary gets the portion you had not yet collected.
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Please read this disclaimer: This internet site provides information of a general nature for educational purposes only and is not intended to be legal and or financial advice. We make no guarantees as to the validity of the information presented. Your particular facts and circumstances, and changes in the law, must be considered when applying insurance law. You should always consult with a competent financial planner, attorney, or insurance professional licensed in your state with respect to your particular situation. The Paul Thordsen Insurance Agency 25319 Wingfield Lane, Spring Texas 77373, Serving Houston Texas, Dallas, San Antonio, Fort Worth, Austin, Humble, Katy, Cypress, Spring, The Woodlands, Conroe, And All Of Texas, Texas Single Premium Immediate Annuities, Senior Financial Estate Planning Texas, 401K Rollover Annuity Houston Texas,
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