Questions and Answers

What is an annuity? Annuities are contracts with an insurance company. You give the insurance company money now. The insurance company returns your investment and any interest growth in the form of regularly scheduled payments in the future. The payments are made as long as you or you and your spouse live or for a fixed number of years, depending on the option you choose.

When are annuities used? Annuities are often used in retirement planning. If someone wants to have an income stream once they are no longer earning a salary, an annuity may be an attractive investment. Annuities are also relatively common in legal verdicts and settlements. Damage awards, particularly in personal injury cases, are often meant to compensate for the inability to earn income extending years into the future. Annuities are uniquely suited for this purpose because they can provide regular, consistent payments lasting for the life of the recipients.

What are the main advantages that annuities offer? The government has given annuities tax advantages to encourage Americans to save for retirement. Annuity earnings are tax deferred; you do not pay taxes on the growth until you receive payments. The tax paid at distribution is at an ordinary income rate. This makes annuities more appealing than CD’s, money market funds, or other conservative investments.

Are there different types of annuities? Yes, there are two main types of annuities, fixed or variable.

What are fixed annuities? Fixed annuities offer guaranteed income. Two key variables are set with a fixed annuity: income rate and time period. You can buy a fixed annuity that pays income for life or over your lifetime plus your spouse's lifetime, called a joint life with last survivor annuity. You could also choose a defined time period to receive the payouts, for example, ten or twenty years.

What are variable annuities? Variable annuities involve more risk than fixed annuities, but offer the potential for higher return. Unlike fixed annuities that provide a guaranteed return, the payments from a variable annuity fluctuate. With variable annuities, your money is invested by the insurance company in portfolios called sub-accounts. Sub-accounts are similar to mutual funds. The amount of income you receive fluctuates with each payment depending on the performance of the sub-accounts you choose.

When would I start to receive payments? It depends on whether you purchased an immediate annuity or a deferred annuity.
What is an immediate annuity? Immediate annuities begin to make payments to you soon after your initial investment. You can decide to get those payments for a fixed period of time, like twenty years, or if you think you are going to live longer than that, you can chose to receive payments for the rest of your life. If you are married, you can choose to have your spouse receive the payments after you die, and those payments would continue for the remainder of your spouse’s life.

What is a deferred annuity? In a deferred annuity, you control when you want to start receiving your payments in the future, typically at retirement. The longer the annuity period, the more time the investment can grow.

How do I put money into an annuity? You can pay up front, all at once in a single-premium annuity scenario. The other alternative is to spread your payments over time. In this scenario, you can pay the same amount each month, or a flexible premium amount.

If an emergency arises, can I access the money in my annuity? Depending upon the type of annuity you purchased, you may be able to withdraw up to 10% of your contract amount without incurring any expenses. Otherwise, you may be subject to the surrender charges imposed by your insurance company. These charges can be steep depending upon how long you have owned the contract. In addition, the IRS will penalize you with a 10% tax on distributions made prior to the time you reach 59 ½ years of age.

How are annuities taxed? While your annuity investment grows, it remains untaxed. The longer your money remains in the accumulation phase, the more growth you will enjoy. You will be taxed at an ordinary income tax rate when you start receiving distributions. Your distribution payments consist of two parts, return of principal and interest. The interest portion is taxed at an ordinary income rate. As long as you purchased the annuity with after-tax dollars, the return of your initial investment is tax-free.

Does it matter whom I buy my annuity from? Yes. The guarantee of future payments is only as reliable as the solvency of insurance company. You should always research the financial strength and stability of your insurer with independent rating agencies prior to purchase.

How are annuities regulated? The type of annuity you are dealing with " whether it is fixed or variable " dictates how it is regulated. Fixed annuities are considered insurance products and regulated by your state’s insurance department. Variable annuities are considered securities issued by insurance companies, and therefore regulated by both the Securities and Exchange Commission and your state insurance department.