Choosing from today’s overwhelming assortment of investment, retirement savings, and life insurance options can be a dizzying experience. Which option will work best for you and your needs? How will you know if the option you choose is a suitable means for meeting your objectives?
Below is a brief overview of annuity products. It is designed to help you determine whether these tax-deferred instruments are right for you, by explaining common annuity contract features and offering discussion-points you may want to cover with your investment adviser.
What is a Fixed Deferred Annuity?
FIXED DEFERRED ANNUITIES ARE TAX-DEFERRED CONTRACTS INTENDED FOR RETIREMENT PLANNING. Depending on your needs, you can either buy a Single Premium annuity, which enables you to purchase the contract with a single sum, or a Flexible Premium contract, which enables you to add to your annuity as often as you’d like.
A FIXED DEFERRED ANNUITY, YOUR MONEY GOES TO WORK FOR YOU IMMEDIATELY, earning tax-deferred interest on the premium payments you make. Fixed deferred annuities offer guaranteed interest rates that are fixed by Western United for a set period of time, depending on which annuity contract you select. After the Initial Interest Guarantee Period ends, you will earn a Renewal Interest Rate, typically set annually by Western United. This rate is influenced by market trends.
FIXED DEFERRED ANNUITIES HAVE TWO PHASES. After an Accumulation Period (when you put the money into your annuity), you begin the Payout Phase. The advantage of fixed deferred annuities is that you determine how long these two phases last. The accumulation phase can range from months to years, and the payout phase allows you to structure your payments either as a single sum, or as a series of payments over a period of years—depending on your needs.
THE MAJORITY OF FIXED DEFERRED ANNUITIES HAVE NO FRONT-END LOADS OR CHARGES, but most carry some kind of charge for early partial or full surrenders. These Surrender Charges vary from contract to contract, so consider how much liquidity you might need before choosing an annuity. Generally speaking, the longer the surrender charge period you select, the higher your interest rate.
Is a Fixed Deferred Annuity right for me?
MOST OF OUR CONTRACTS ALLOW YOU A CERTAIN AMOUNT OF FREE PARTIAL SURRENDERS EACH YEAR.
Depending on which annuity contract you choose, the amount free of Surrender Charges may include Interest only, 10% or even 15% of your principal and interest. This may be an important consideration if liquidity is a concern. Taxes may be due on partial surrenders from your annuity; therefore, you may want to discuss partial surrenders with your tax advisor.
For many people, the fact that a fixed deferred annuity offers guaranteed principal is an important consideration. Contracts that offer this feature promise that you will receive 100% of your original premium payment (principal), even if you elect to terminate your annuity contract early. If this feature is important to you, ask your advisor to show you contracts with a guaranteed principal feature.
HOW DO I KNOW IF FIXED DEFERRED ANNUITIES ARE RIGHT FOR ME?
Fixed deferred annuities meet a wide range of needs, but they aren’t for everyone. If you are looking for immediate, unfettered access to your funds, a bank account may be a better choice. If you want to participate in the equity market and are willing to assume greater risk, fixed interest rate annuities may not be for you. However, if you are looking for an excellent retirement planning tool that affords you tax benefits, flexibility, and safety, a fixed deferred annuity is likely to suit your needs and objectives. Fixed deferred annuities can play an important role in just about anyone’s retirement planning. How large a role fixed deferred annuities will play depends on many factors, including your age, the amount of time you have to accumulate assets, and other factors your adviser can review with you.
What is a Single Premium Immediate Annuity?
If you are looking to provide yourself with a RELIABLE SOURCE OF INCOME, WHERE YOU CAN STRUCTURE YOUR PAYMENTS TO LAST ANYWHERE FROM FIVE YEARS TO LIFE, a Single Premium Immediate Annuity (SPIA) might be what you’re looking for.
GUARANTEED INCOME: A Western United SPIA will guarantee a monthly, quarterly, semi-annual or annual (modal) payment, determined when the contract is issued, that starts at least one mode from issue. The payment amount will not change. Because each payment consists of both interest and a return of principal, SPIAs have a tax advantage over many other common investments.
FLEXIBILITY: Western United SPIAs can be tailored to meet individual needs. Payments can be designed to increase or decrease over time, can be set for a specific amount, a specific time or for life. Payments can be scheduled for modal frequencies of monthly, quarterly, semi-annual, or annual.
EASY ACCESS: You can have your payments deposited directly into your bank account, so you never have to worry about how long it will take for it to arrive in the mail. Payments may also be sent to one or multiple third parties for use in paying expenses such as life insurance or long-term health care policies.
DEATH BENEFITS: In the event of the Annuitant and/or surviving joint Annuitant’s death, payments may continue or end, depending on the payment option elected. If you select Period Certain payout options, any remaining period certain payments due will be paid to your beneficiaries.
AVAILABLE PAYOUT OPTIONS INCLUDE:
- PERIOD CERTAIN – Modal income payments for a specified period of time, such as 5, 10 or 15 years.
- FIXED PAYMENT – Fixed modal income payments that continue until the single premium, plus interest has been exhausted.
- LIFE & PERIOD CERTAIN – Modal income payments for the greater of the Annuitant and/or surviving joint Annuitant’s lifetime or, the period certain (5, 10, 15, or 20 years) selected.
- LIFE INSTALLMENT REFUND – Modal income payments for the rest of the Annuitant and/or surviving joint Annuitant’s lifetime. If the Annuitant(s) dies before the single premium has been paid, payments will continue to the Beneficiary until the remaining single premium is returned
What are the benefits of owning an annuity?
TAX-DEFERRAL is one of the great advantages annuity products have over most bonds, bank certificates of deposit, and the majority of mutual funds. The interest earned on your annuity is tax-deferred; therefore, your money grows faster than it would in a taxable fund. As long as you keep your funds in the annuity, taxes are deferred. When you begin withdrawing funds, they become taxable.
The IRS considers your first withdrawals interest, but your principal generally is not taxable in a non-qualified plan (different rules apply to annuities in a qualified plan like an IRA). Withdrawals of interest income before age 59½ may be subject to a 10% federal income tax penalty. For more details, you should go over the tax situation with your tax advisor.
SAFETY is another important feature of the annuity. Most life insurance companies, known for their conservative business practices, will guarantee your principal and a minimum interest rate. Ask your insurance producer about working with life insurers and the protections afforded you.
FLEXIBILITY attracts many individuals to annuities. You decided how you want to pay (in a single sum or in a number of smaller deposits that fit your schedule); you decide how you want to be paid (in a single sum disbursement on a fixed date or in a series of payments); and you decide how the annuity will be handled after your death. Unlike other financial instruments, an annuity is able to provide you with a guaranteed income for the rest of your life—an income you cannot outlive.
AVOID PROBATE: A final advantage many annuities offer is the ability to avoid probate. Typically, annuity death benefits paid to a beneficiary, other than an annuitant’s estate, avoid the emotional and financial drain caused by probate.
I've decided to purchase an annuity, what now?
Once you and your advisor have determined that annuities are a good fit, you can then explore your options. It helps to discuss when and for how long you will receive income payments. This decision can be affected by whether you are married, what kind of payment schedule suits your needs, and whether you want payments to continue after your death.
OTHER QUESTIONS YOU MIGHT WANT TO EXPLORE ARE:
- How much liquidity do you need?
- What is the surrender charge schedule?
- How important are free partial surrender features to you?
- What kind of interest rate schedule do you want: one that offers a guaranteed rate for one year or for many years?
Annuities offer you a range of choices. So, it helps to thoroughly review your needs and objectives with your advisor before selecting an annuity product. We hope this has answered some of the questions you may have had, and that you’ll find just the right annuity for your needs and goals.