Annuities Contracts

Annuity contracts contain exclusions, limitations, reductions of benefits, and terms for keeping them in force

When most people think about retirement, the first thing that comes to mind is pensions. However, annuities have become a smart retirement option over the last few decades. Annuities are contracts between an individual and an insurance company in which the individual pays a premium in exchange for a series of payments from the insurance company. Annuities are financial products intended to enhance retirement security. An annuity is an agreement for one person or organization to pay another a series of payments. Usually the term “annuity” relates to a contract between an individual and a life insurance company.

Features of annuities

In general, annuities have the following features.

1. Tax deferral on investment earnings

Many investments are taxed year by year, but the investment earnings—capital gains and investment income—in annuities aren’t taxable until the investor withdraws money. This tax deferral is also true of 401(k) s and IRAs; however, unlike these products, there are no limits on the amount one can put into an annuity. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs.

2. Protection from creditors

People who own an immediate annuity (that is, who are receiving money from an insurance company), are afforded some protection from creditors. Generally the most that creditors can access is the payments as they are made, since the money the annuity owner gave the insurance company now belongs to the company. Some state statutes and court decisions also protect some or all of the payments from those annuities.

3. An array of investment options

Many annuity companies offer a variety of investment options. For example, individuals can invest in a fixed annuity that credits a specified interest rate, similar to a bank Certificate of Deposit (CD). If they buy a variable annuity, their money can be invested in stocks, bonds or mutual funds. In recent years, annuity companies have created various types of “floors” that limit the extent of investment decline from an increasing reference point.

4. Taxfree transfers among investment options

In contrast to mutual funds and other investments made with aftertax money, with annuities there are no tax consequences if owners change how their funds are invested. This can be particularly valuable if they are using a strategy called “rebalancing,” which is recommended by many financial advisors. Under rebalancing, investors shift their investments periodically to return them to the proportions that represent the risk/return combination most appropriate for the investor’s situation.

5. Lifetime income

A lifetime immediate annuity converts an investment into a stream of payments that last until the annuity owner dies. In concept, the payments come from three “pockets”: The original investment, investment earnings and money from a pool of people in the investors group who do not live as long as actuarial tables forecast. The pooling is unique to annuities, and it’s what enables annuity companies to be able to guarantee a lifetime income.

6. Benefits to heirs

There is a common apprehension that if an individual starts an immediate lifetime annuity and dies soon after that, the insurance company keeps all of the investment in the annuity. To prevent this situation individuals can buy a “guaranteed period” with the immediate annuity. A guaranteed period commits the insurance company to continue payments after the owner dies to one or more designated beneficiaries; the payments continue to the end of the stated guaranteed period—usually 10 or 20 years (measured from when the owner started receiving the annuity payments). Moreover, annuity benefits that pass to beneficiaries don’t go through probate and aren’t governed by the annuity owner’s will.

How Do I Buy An Annuity?

1. Determine your current and future financial needs, and ask for help from one of our experts.
2. Your choice of annuity product depends on your goals — income or growth, for example — and a comparative evaluation of the contract terms. Some annuities come with an illustration to give investors full transparency. Annuity providers also give a prospectus to investors considering variable annuities. Like illustrations, the purpose of the prospectus is to help investors make informed decisions.
3. Submit An Application: Having all the necessary information in your application can help ensure that you get the quoted interest rate. If any part of your application is missing or incorrect, it could slow down processing time and lead to the insurance company not honoring the initial quoted rate.
4. Decide how you will pay: You can use cash, funds from a retirement account, or a transfer from another brokerage. Keep in mind that each payment option may have different tax implications.
5. Use The free-look period: Be sure to take advantage of the free-look period that we offer. This allows buyers a window of 10 to 30 days from the contract start date to back out and receive a refund if they’re unhappy with their purchase.