Annuity

Annuities come in many forms for investors or as a guaranteed settlement. They come as fixed annuities and variable annuities. You can also find a hybrid type that includes not only a guaranteed income, but also a life insurance policy.

The purchaser of an annuity is looking for a guaranteed income in the future or immediately. The annuity can be used to reduce probate costs of an estate. The heirs of an annuity investor can get quick access to the funds within the annuity. This happens due to the fact annuity funds are not subject to probate and therefore can pass immediately to the listed beneficiary. For this reason, annuities are used as part of a long-term financial plan or for estate planning purposes.

Annuities are tax-advantaged investments that allow for better growth than an investment without these advantages. Most annuities are contracts between the purchaser and a life insurance company. This contract has iron clad guarantees that are backed up by solid financial institutions. Investors are wise to look into the strength of the annuity provider. The guarantee is only as good as the company that backs it. Other considerations are the buyer’s tax bracket, the availability of funds that can be left invested and the age of the buyer. How much will be needed to afford a reasonable retirement or supplement to retirement. Annuities give several advantages for the investor, but they must be seriously studied and examined.

A fixed annuity pays a guaranteed interest rate and offers safety of principle. These annuities promise a fixed interest rate, a fixed payment amount and the payment Is for a fixed period of time. The annuities are usually sold by an insurance company, which means that the guarantee is as solid as the company. A M Best rated “A” insurance companies are considered very safe places to put your money. A superior Best rating does not insure that the annuity is the best value being offered. Best only rates the financial strength of the underlying insurance company. The SEC does not control these annuities. The insurance commission in each state has this jurisdiction.

The basic difference between fixed and variable annuities is that the investor gives up the growth potential of a variable annuity for the preset safety of the fixed annuity. The investor does not know how much will be available for distribution when the accumulation period is over in a variable annuity. The amount is known as a fixed annuity. This alone may make the fixed option more popular with some annuity buyers.

A variable annuity allows the aggressive investor to put his annuity premium in many types of investment such as mutual funds, stocks or bonds. A special type of annuity allows the investor to use an index as the investment. Because this annuity allows for investment in SEC controlled entities, this type of annuity is SEC controlled. If there is a gain, the profit is wholly own by the owner. If there is a loss the owner takes the loss. The reason for either investment is they avoid probate. The profits or interest gains are deferred as far as current income taxes are concerned. Many life insurance companies offer different annuity plans that are sold through their representatives. What is best for an individual investor depends on their current circumstances and what they want to accomplish with their money for the future. Their current tax situation is one of the important elements that determine what would be the best course for the future. The annuity investment can be changed from one mutual fund to another. If the annuity value has grown substantially over the accumulation period, the annuity investment could be changed to a safer investment form. This flexibility of the variable annuity makes it a popular choice for the buyer.

The difference between this annuity and the fixed makes some investors willing to take the risk, elect to try to get the added growth that may come from mutual funds. Risk tolerance is the guiding factor for those deciding between these two annuities. Possible growth vs. guaranteed results is the decision that needs to be made. This is a clear choice for the appropriate investment for each annuity buyer.

The following details are designed to help the potential buyer come to a better understanding of how annuities work and the advantages of owning one. This investment has many facets, which need to be understood in order to make a good and timely decision. The details listed below are put forth with this thought in mind. The details are important if one is to understand the difference between a fixed annuity and a variable annuity. It is important to understand the tax advantages. It is critical that the buyer know what they are buying and why. It is imperative that the buyer knows the cost and charges that come with annuity ownership.

The combination of life insurance with an annuity is a double guarantee for the investor. The buyer of this combo investment makes sure that his heirs will receive money if he or she dies and he or she will have a fixed income at a time certain for a fixed amount for a fixed period. This guarantee while not perfect does solve two problems with one purchase. A thoughtful financial planner may be able to come up with a better plan for the investor, but this will suffice for many families and is certainly better than not having any future plan for needed funds. The tax-advantaged savings is an added plus for the investor.

This idea needs careful analysis as to what is the best way to purchase life insurance. Expert advice in this area is certainly advised. Referrals to such experts are important to get as unbiased an idea as you can get. One shoe does not fit all is true in this area of financial investing and planning for the future. This choice needs to be made with facts on hand. Careful consideration is the watchword.

The accumulation phase of an annuity is the time that the annuity is allowed to grow without any withdrawals. An immediate annuity would have no accumulation phase as it begins paying out immediately. A ten year deferred annuity would have an accumulation period of ten years. Accumulated value will directly determine the monthly payment amount for a fixed number of months. It also would set a lump sum payout amount. Accumulated value can determine more than the payout, it can set the number of payouts and it could also suggest a possible change of investments inside the annuity.

The distribution phase starts as soon as the first withdrawals are sent out as payments to the investor. A 20-year guaranteed annuity would have a distribution phase of 20 years and would have a guaranteed payout. As stated before, the accumulated value will determine the amount of distributed monthly payments or the lump sum payment.

Another factor about distribution is that there are ways to accelerate this distribution. Some annuities allow for changes after distribution is started. There are also companies, which will buy your annuity for a lump sum. These may not be in your best interest, but if you need the money, you need the money. Companies that do this use a formula that takes into consideration the time value of money plus a profit for the company. Before doing this, the annuity owner should check to see what is available from the annuity provider.

Annuities can be used to avoid probate of those amounts of your estate placed in an annuity for the benefit of your heirs. It can also be used for giving money to a favorite charity. These investment vehicles are settled outside of the probate court and therefore eliminate any probate charges and loss of time in getting the money to the heir. Probate charges are set by the state and can be a significant percentage of the overall estate. Keeping this money from going through probate makes sense as it saves the estate expensive and costly charges.

The income from an annuity is usually tax deferred. The proceeds from these annuities can be deferred until the investor is older or in a lower tax bracket. This is a significant advantage for higher income investors. If the investor is at their peak earning point in life, investing in an annuity for later retirement or as a safe guard for the investor’s heirs, lets the gross amount grow with time without any current tax consequences. Taxes are deferred until withdrawals are started at a later date. The deferred taxes helps to increase the growth of the annuity because it allows all of the money to earn interest or mutual fund growth. The deferred tax-free environment over a twenty-year period can substantially increase the amount available for withdrawal. It is only at this time that taxes begin to be paid.

The annuity insurance company will state the amount of taxable income. Charts showing this advantage are easily found on the Internet through any good search engine. An example run through one of these Internet calculators shows a difference after 20 years of over $16,000. This result generated from an initial investment of $10,000 in a tax-advantaged annuity. This is the reason this form of savings has gained popularity with investors. The tax-free growth of the annuity while in the accumulation phase is the basic advantage of this type of investment. Annuities can be purchased and owned in addition to other retirement vehicles like IRAs or Roth accounts. The difference is the funds used to start an annuity are after-tax funds.

These calculators can be readily found on the Internet. A potential investor can see what amount of investment is needed to guarantee a fixed amount each month over a fixed period of time The answers however do not take into consideration the cost in acquiring the annuity from a life insurance company. An annuity calculator can also display the amount of monthly pay a specific amount of up-front investment will generate and for how long. Calculators are easy to use and give quick ballpark answers for inquiring investors. These tools are user friendly and will give the user a very good insight into the results from owning an annuity. Calculators focus on the exact amount needed to provide a specific monthly income. They also show what is needed in the way of starting investment. Their ease of use makes running what-ifs very simple to do and to gain the knowledge needed to make an informed decision.

Most annuities can be purchased for a commission of between 1 to 12 percent of the lump sum paid. Commission percentages are paid out via different terms depending on which life insurance company the annuity was purchased from. The commission payout variance can be from a modest one percent to a healthy seven percent right up front. The percentage balance left will be paid out by the contract terms of the annuity. The purchase price of an annuity should be considered as well as the terms of the annuity. The investor’s needs are paramount in the selection of whichever annuity is picked. The circumstances of the investor, the current tax situation and the age of the investor will help to dictate the best annuity for the individual annuity buyer.

There are other fees to be concerned about when considering annuities. There is a fee called a surrender fee. If for some reason, you decided to close the annuity in the first year, you could be charged as much as 7% of the value of the annuity. Each year thereafter the surrender fee would be less until there is no charge. With this in mind, an annuity should be purchased with money that you know will not be needed in the near future. Another fee is the amount charged to buy a mutual fund within an annuity. The charges are higher in many cases, than if you bought the fund directly for your self. Make sure that you understand all of the expenses associated with the purchase of an annuity. Surprises after purchase are not something you want to befall you.

Another point of understanding is what changes or options are available to an investor and when and if they can be changed or modified. The important point being is there a charge for making the change.

On the Internet an investor can find annuity calculators, which can be used to see what total investment is needed to generate a fixed amount of income per month. Also, the potential investor can see what various insurance companies are offering. There are a wide variety of possible annuity options to choose from. This investment will take some investigation. Many major insurance companies offer annuity contracts. A list of those companies can be acquired on the Internet by typing annuities into any search engine, i.e. Google.com or ChaCha.com.

Any search engine will disclose many insurance companies that offer a variety of annuities. You can read about their offers, their cost and their benefits on these companies’ sites. This info will assist any potential buyer with the seeds of knowledge that will help with a better decision-making process. Some knowledge and asking the right questions will further this quest for good information. This is a serious source for information on annuities.

As you can see, there is a lot to consider when buying an annuity. A buyer would be wise to get advice from several sources when looking for an annuity investment. Referrals to an ethical financial planner would be excellent as you are going to have to buy the annuity from some one. A suggestion would be to try to inform your self by reading first before these meetings so you can understand what is being said and ask informed questions. Familiarity with terms, options and cost are a good place to start. With this fore knowledge a person can be better prepared for meetings with experts. Asking the right questions can be important as to a better investment type, a fairer cost/benefit annuity or safety of the investment. Being somewhat aware also allows for understanding what you are being told by the various expert sources.

Having some knowledge before hand will lend itself to asking better questions and also coming away with a better understanding. Knowing about what you want and what is available will let the buyer acquire annuities better suited to their needs. These investment opportunities can provide a substantial answer to the needs the retirement investor. This time in a person’s life requires careful planning for the important financial needs for retired living.