An annuity is an agreement between an individual and a legal
reserve life insurance company. It is similar to a qualified
retirement plan. Annuities can be funded in a lump sum or a
little at a time and all of the capital grows and compounds on a
tax deferred basis until withdrawals are taken.
Unlike retirement plans, there is no limit as to how much you
can invest! The death benefit from an annuity passes immediately
to the beneficiaries, saving them the publicity, delay and
expense associated with probate.
There are three different types of annuities:
Fixed Annuities
The issuing insurance company guarantees the principal and a
guaranteed minimum lifetime interest rate. The credited interest
rate can be higher than the guaranteed minimum interest rate,
but never lower.
Once interest is credited it can not be lost because it is added
to guaranteed principal. Gains are locked in annually.
Fixed annuities are invested primarily in government securities
and high grade corporate bonds. They are also referred to as
declared interest rate annuities because the insurance company
annually declares the interest rate for the coming year.
Equity Indexed Annuities
Equity indexed annuities are basically fixed annuities with an
additional interest crediting alternative. In addition to a
lifetime guaranteed fixed rate option, there is an opportunity
to have interest credited based upon the performance of various
major indexes (S&P 500, Nasdaq 100, Russell 2000, etc.).
Equity indexed annuities offer equity-linked earnings with gains
that are locked in annually, without stock market risk. Because
the principal is guaranteed, no losses can be incurred even if
the index drops 100%. There is no loss of gains from one year to
another.
Generally, there is a choice each year to switch between the
guaranteed interest rate and the equity-linked earnings without
any penalty. Variable
Annuities
These annuities have a higher risk because the investment is
placed directly into mutual funds, which can rise and fall in
value. 30% can be earned in one year, 30% or more may be lost in
the next year. For many people, this uncertainty is too much to
tolerate after watching other investments in the stock market
plummet over the past few years. Because of this, these
annuities may not be safe and are not available through Senior
Care.
The liquidity of annuities is very liberal. Usually 10% of funds
are available without penalty after either the first 30 days or
after one year. The liquidity with Certificates of Deposit is
limited to a 7 - 10 day window once a year.
The withdrawals are taxable when interest is taken out and not
taxable when principal is removed.
The penalties on withdrawal are referred to as surrender
charges. They are assessed by the insurance company because
they do not charge any upfront fees or commissions when money is
invested with them. 100% of the money goes to work immediately.
It’s not like how stock and mutual funds work. In this case a
fee is taken off the top and all of the money does not go to
work for the individual. The life insurance industry rewards
loyalty and stability. All of the surrender charges are waived
after roughly 7 - 10 years. This means that if the money
stays put - all of the fees, commissions and acquisition costs
are absorbed by the insurance industry.
You pay zero!
Choosing The Right Annuity
At this time there are over 25,000 different annuities available
from the insurance industry. Choosing the right annuity is a
process that must begin with an understanding of the desires and
special circumstances of each person. This is why there are no
recommended annuities listed on this site. Recommendations will
be given after a meeting in person, either at your home, our
office in Long Beach or at a place of your choosing. All
suggestions will, however, be with highly rated, large and
reputable legal reserve life insurance companies.
