Strings Insurance Group

Trying to get the best fixed annuity can be a daunting process since there are so many products advertised. The hard part is deciding the most important factors that go into the pricing of a fixed annuity. For instance, do you simply want the highest interest rate which, in turn produces the largest monthly payment? If so, then it is easy to find a local broker and get a fixed annuity quote. However, this focusing on only the largest payment means that you do not care about surrender charges if you have to withdraw additional money. It also means you don’t care that you have never heard of, nor know the strength of, the insurance company offering the highest rates.  In buying a fixed annuity contract, you are making a significant long term financial commitment. You need to consider each of the major factors involved in the pricing of these annuities to determine the best package for your financial situation.

We will first look at the factors you need to review and then put it all together.

Length and Size of Contract

Insurance companies will offer higher rates for long term fixed annuity contracts with large contributions. You will find this same principle when you shop for a CD at your local bank. The longer the period and the higher the investment amount, then the higher the interest rate the bank will offer. Contract length and size are important if you are shopping for a fixed annuity as an investment, with the intention of withdrawing the entire fund at or before retirement. For the average person seeking long term retirement security, it is assumed that the contract period will be long. The size of the contract will be as much as you can afford. Size should not be a major consideration for the average person seeking long term security in retirement.

Too Much Flexibility during Accumulation Period

When you look at the individual contract provisions, your immediate thought will be to ask for more flexibility in each of the options offered. For example, normal withdrawal penalties are charged if you withdraw money during the first seven years of the contract. You may request these penalties to be charged only in the first 5 years of the contract. Another option might be the choosing the highest minimum interest rate guarantee. Getting a higher minimum rate guarantee usually means the insurance company crediting you with a lower actual interest rate later in the contract period. Each of these type options affect the actual interest rates credited by the insurance company. If flexibility is not really needed over the long term, asking for less flexibility in the options will allow the company to credit higher interest rates. A higher interest rate will increase your eventual annuity payments.

Market Interest Rate Environment

Fixed annuity contracts are based on the market interest rate environment at the time you enter the contract. This is logical since the insurance company will theoretically use your contributions to buy certain fixed investments in the market. This is similar to why bank CD interest rates rise and fall with market interest rates. If you enter a fixed annuity contract when rates are high, eventual annuity payments will be higher. If the market rates are relatively low, your eventual monthly payments will be lower.

The problem with interest rates is that nobody knows where market interest rates are going. You may be inclined to delay signing an annuity contract until interest rates increase. However, you might be waiting a long time, and risk losing the benefits of starting a fixed annuity program early in your career. It is better to focus on how a fixed annuity fits into your overall financial plan and not try to wait for the interest rate environment to change.

Which Insurance Company

Since you are making a long term commitment, you want to be sure your insurance company is strong and financially sound. Insurance companies can become insolvent over the years. Even though you would be guaranteed certain payments by the state in which you live, you really don’t want to go through a scenario of the insurance company becoming insolvent. When seeking annuity quotes, you will encounter insurance companies that you have never heard of. Look at A.M. Best, a company which rates insurance companies each year. You want only A or A+ rated companies with names that you recognize. You do not want lose sleep wondering if your insurance company will be in existence 30 years after your buy the contract.

Withdrawal Provisions

All fixed annuity contracts have withdrawal penalties in the early years of the contract. Some companies may limit these penalties to the first 5 years of the contract. Other companies might extend the penalty period over 7 years. In general, the shorter the period, the lesser the interest rate that will be credited to your contract. In reality, most people never make early withdrawals from an annuity contract.  If you select a shorter period just to have withdrawal flexibility, you may be doing yourself a disservice over the long term. You should keep sufficient cash assets outside of the annuity contract to cover emergencies or unforeseen expenses. By doing this, you should not need a shorter withdrawal penalty period and, therefore, will receive a higher interest rate.

Longer Guarantee Period

While all fixed annuity contracts offer some type of interest rate guarantee, the length of the guarantee period will vary greatly. Generally, you want the longest guarantee period you can find. You need to avoid contracts advertising a very high interest rate which is guaranteed for a short period such as one or two years. The interest rates credited in the following years will most probably drop drastically.  As with most products we buy, this type of sales promotion will hurt you over the long term.

Shopping for an Entire Fixed Annuity Contract Package

As noted early on, you should not focus only on one factor such as the interest rate, though this is extremely important. You need to balance all factors to produce a sound contract that will be in effect for many years to come. Look for a combination of the highest interest rate credited, longest rate guarantee period, least withdrawal charges, and lowest expenses.

Naturally, you probably won’t find a contract that fulfills all of these goals. Some companies will have the highest rates along with higher expenses than other companies. Others may have liberal withdrawal provisions, but shorter guarantee periods. This is where you need to prioritize based on your own situation. Are you willing to accept a shorter guarantee period, but lower annual expenses? Are you willing to willing to accept harsher withdrawal penalties in exchange for a higher interest rate? The one factor you should not compromise on is the quality of the insurance company. Never choose a lesser rated company to get a higher interest rate. Safety of your retirement assets should always be your first concern.

If you are unsure of some of the provisions, delay signing the contract and keep shopping until you are comfortable with the entire contract.  You can call each of the companies yourself or you can search for fixed annuities explained online. Most important is to do research and read a number of articles before you contact an insurance company. You want to be able to tell the insurance agent what you want and your primary goal.

Take your time in researching and searching for the best fixed annuity contract. In the end, you will be confident that the contract fits well into your plan for a long and happy retirement.

Most people are have heard of annuities. The general theme is that you make your contribution to an insurance company, and begin to receive monthly payments when you retire. How and when you make the contributions, and when you begin to receive your monthly payments determine if you have an immediate annuity or a deferred annuity.

Similarities between Immediate and Deferred Annuities

In an immediate annuity contract, you start to receive payments out as soon as you buy or fund the contract. In a deferred annuity you buy or fund the contract, and begin to receive payments at some point in the future, which could be one year or many years.

The intent of all annuity contracts is for you to deposit money with the insurance contract, have the money accumulate on a tax deferred basis, and receive periodic payments at some point. While your money is on deposit with the insurance company, you will not be taxed on the earnings each year as you would if your money was in a bank savings account. The earnings will be taxed when you receive each periodic payment or make an early withdrawal.

In addition, the insurance company guarantees your principal and interest (unless you have a variable annuity contract), as well as the payment of the periodic payments. These are the great advantage of annuities. Your interest earnings are tax deferred, and you receive an insurance company guarantee of principal, interest, and eventual payments.

Both immediate and deferred annuities can be designed as variable annuity contracts. In a variable contract, your balance accumulation and payments you receive are tied to the performance of stocks and bonds, or a combination of the two. This gives you more potential for larger, or smaller, increase in your investment and annuity payments than just the interest rate credited by the insurance company. The downside is that the insurance company does not guarantee principal and interest.

Deferred Annuities

A deferred annuity can be a good way to save if you have over 10 years before you will retire and begin to receive payments. You can start the contract without having to make a large contribution immediately. These contracts are designed for you to make a monthly or periodic contribution to the insurance company, and then receive payments when you retire. These tax deferred contracts are especially good if you are already making the maximum contributions under a 401k or IRA plan. Your contributions to a deferred annuity do not come under the maximum contribution rules found in a 401k or IRA, unless you are actually using the contract to fund your IRA or 401k.

A deferred annuity contract can also be purchased with a lump sum contribution. If you suddenly come into a large amount of money, such as inheritance or work bonus, putting this money in a deferred annuity can be advantageous if you do not need the money for a number of years.

The tax effects of a deferred annuity are spread out. When you retire and begin to receive monthly payments, each payment will consist of partly taxable earnings and partly tax free return of your contributions. Therefore the income tax on your earnings is spread over your entire retired life.

Deferred annuities may not be the right choice if you know that you will need to withdraw money within 10 to 15 years. There are a number of penalties that could apply if you take money out before retirement. Withdrawals prior to age 59 ½ will taxable as ordinary earnings, and you may receive a 10% penalty by the IRS. In addition, these early withdrawals will be considered as first coming out as all taxable earnings, and then your tax free contributions, unless you receive periodic payments for a long period of time. Essentially, if you take money out before age 59 ½, the entire payment might be considered taxable, and you may have to pay an additional 10% penalty. It gets worse. If you take money out within the first 7 years of the contract, the insurance company may impose a withdrawal or surrender penalty. This penalty goes down with each year the contract is in effect.

As you can see, deferred annuities should not to be used as a short term savings program or emergency cash fund.

Immediate Annuities

An immediate annuity will start to make payments to you within a month or two after you purchase the contract. You put in the entire purchase price of the annuity in a lump sum and begin to receive payments immediately. These payments can be made under one of the many payout options offered by the insurance company.

These annuity contracts are designed for investors who have accumulated their assets under another investment program, such as a mutual fund or brokerage account. At retirement, you would then transfer your mutual fund or brokerage balances in cash to the insurance company to buy the immediate annuity and commence receiving annuity payments.

The monthly payments you receive under an immediate annuity receive the same tax treatment as a deferred annuity at retirement. Each payment will be received partly as tax free earnings and partly as return of your tax free contributions.

There are several advantages to buying an immediate annuity. You receive guaranteed payments from the insurance company. Interest earned on your contributions is tax deferred during retirement with only a portion of each payment being taxed. You have complete freedom to accumulate your assets prior to retirement in whatever investment program you want, and not be subject to insurance company penalties on early withdrawals.

Be Sure of Your Purpose Before You Leap

Annuities are appropriate for long term savings and guaranteed retirement payments. Either a deferred annuity or immediate annuity fulfills this goal. If you are looking for a short term savings program or plan on withdrawing funds before retirement, you need to really understand the various penalties involved. In many cases, these penalties outweigh the benefits of using a tax deferred annuity.

You also need to analyze the annual expenses charged in annuity contracts.  These expenses can be higher than in other forms of investments. Your insurance agent will also receive a commission on the sale of the annuity contract. Contract expenses are the primary reason financial advisers may not recommend  an annuity to a particular client.

Again, annuities are not for everyone, especially if you have a short term investment plan. However, for many people with a long term outlook, an annuity may be a good choice in saving for retirement.

You do not have to put all your savings in any one investment or annuity contract. You can use an annuity as only one part of your overall financial plan. Many people keep a portion of their savings in a bank account for emergencies or unforeseen expenses, an investment program in mutual funds for continued growth, such as a 401k, and put a portion of their assets in an annuity contract to receive lifetime monthly payments.

An annuity should be considered by all people looking forward to a safe and enjoyable retirement. You need to understand and compare all of the contract provisions so that you know exactly what you are buying. Once you buy an annuity contract, you will then have the peace of mind that your money will be there when you need it in retirement.

There are two primary types of annuities: fixed and variable. In a fixed annuity, the insurance company guarantees to credit your account with a minimum amount of interest during the accumulation, or earnings, phase of the contract. The company also guarantees to make periodic payments to you during the payout phase under the payment option you select. There are numerous payout options for you to choose from, such as fixed payments to you for life, payments to you for only a specified period of time, or payments over the combined lives of you and your spouse. Fixed annuities are not securities, and are not regulated by the SEC. Premiums paid in are placed in the insurance company’s general account, which is a commingled fund used to back all guarantees of the insurance company under all insurance and annuity contracts.

In a Variable Annuity, you have control over the investments during the accumulation phase.  You, as contract owner, and not the insurance company, may choose to have your premiums invested in a number of investment options, usually mutual funds. The periodic payments you eventually receive will be fixed, but the calculation of the payments will be dependent upon the investment performance of the funds you selected during the accumulation phase.  Since contract values are totally dependent upon the investment return of selected mutual funds, variable annuities are considered securities and, therefore, regulated by the SEC.

Equity Indexed Annuities – Overview

An equity indexed annuities combines certain aspects of fixed annuities and variable annuities. During the accumulation phase, you receive credited interest based on the performance of the mutual funds selected. The rate of return paid is linked to a financial market index, usually the Standard & Poor’s 500 Composite Stock Price Index (S&P 500). If the index goes up, your account is paid a portion of the gains. If the index goes down, you are protected from suffering significant losses since the principle is guaranteed. The insurance company also promises to credit your account with a minimum guaranteed interest return. During the payout phase, the insurance company will make guaranteed periodic payments under the payout option you select at that time.

Equity indexed annuities are considered to be fixed annuities and are not subject to SEC regulations. This is due to the crediting of a minimum guaranteed interest rate and guarantee of principle by the insurance company.

Contract Details Affecting Earnings

Several factors affect the amount of interest credited to the account each year. Each of these factors needs to be compared and analyzed when shopping for an equity index annuity.

Participation rate – this rate calculates the amount of increase in the linked index that will be paid. If the participation rate is 80%, and the S&P 500 rises 4%, the annuity contract would be credited with 3.2% (.80 times 4%).

Methods of Crediting the Participation Rate

• The Annual Reset or Rachet – This method calculates the annual percentage change in the linked index from the start of the contract year to the end of the contract year. This method locks in your gains each year, which can be beneficial if rates drop at the end of the year.

• The High Water Mark – This method identifies the highest level of the linked index during the year and uses this as the comparison point at the start of the next year. More interest may be credited using this method than other indexing methods, but interest is not credited until the end of the term.

• The Point-to-Point – This method calculates the change in the linked index between account values at the beginning and end of the year. This method may produce more interest if the interest and participation rates are relatively high. However, the high point during the year may end up being lower than other points during the term of the contract.

• Interest Rate Cap – Some equity indexed annuity contracts have a maximum rate that will be credited over a certain period of time. If the maximum interest rate is 8%, and the S&P 500 rises 20%, your contract will be credited with only 8%. On the other hand, some upside potential with no downside risk can be quite beneficial depending upon your investment objectives and risk tolerance level.

Administrative and Management Fees

Some insurance companies will charge administrative and management fees, as percentage of account value. These fees will be deducted from your earnings under the contract. Other companies may have no administrative fees, but higher management fees. It is important to identify what fees are charged and how they will be calculated because these fees are not always easy to spot in the contract.

Benefits of an Equity Indexed Annuity

These annuities are well suited for conservative investors who need some exposure to equity investments, but cannot afford a severe dip in their retirement assets. Older investors nearing their retirement age or high income investors who have surpassed the maximum limits under their retirement plans may be excellent candidates for an equity index annuity.

No Two Contracts are the Same

It would be easy to compare contracts if all insurance companies were mandated to use the same provisions, and only the percentages or numbers could change. Unfortunately, this dream does not exist since the equity index contracts cannot be bought and sold like a share of common stock. The characteristics and factors noted above are the provisions found in all equity index contracts.  However, the provisions might be called by different names and the factors may vary in how the exactly work. Accordingly, you need to thoroughly understand the provisions of each contact and ask many questions of the selling insurance agent. This is a long term investment; one affecting your entire retired life. A bit of reading and questioning now will prevent unexpected results later on.

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Variable annuities were a welcome addition to the insurance product arsenal back in the 1970’s. With the advent of the 401k plan, and IRA’s, the average worker began learning about investment planning for retirement and tracking their investments on a regular basis. Also, with inflation spiking in the 70’s, retirees began clamoring for more investment related products from the insurance companies. The insurance companies answered this call by designing the variable annuity product. The variable annuity allowed contract owners to receive some of the guarantees offered in fixed annuity contracts, while getting exposure to stock market investments. Advertising was intense and many people moved their retirement nest eggs into variable annuity contracts.

What is a Variable Annuity?

A variable annuity is a contract with an insurance company, in which you make a lump-sum payment or series of payments. The insurer guarantees to make periodic payments to you beginning immediately or at some future date. You can choose to have your account balance invested in a range of investment options, which are normally common stock mutual funds. The value of your variable annuity account will go up or down depending on the investment performance of the options you have chosen.
The variable annuity contract also has a number of provisions or available riders that are popular in fixed annuity contracts. Some of these provisions are guaranteed periodic payments under different payout options offered when you retire, tax deferred treatment of investment earnings, built in death benefits.

The First Variable Annuity Stumbling Block

As stated before, variable annuities were heavily promoted in the 1970’s and sold as the most modern investment for retirees. Unfortunately, several years after the first rush of variable annuity products hit the market, the stock market began dropping and the economy went into recession. Nothing unusual in the investment world, but this event appeared to take all variable annuity owners by surprise.

There was much grumbling as contract balances began to decline, especially if the variable annuities were in company sponsored pension plans. The variable annuity contracts performed exactly as they were designed to perform. For several reasons, the contract owners never thought the contract values would drop. These reasons had to do with how the insurance agents described and sold the contracts, the average worker did not truly understand how these contracts worked, and a blind desire to get more growth in their retirement assets.

Once the fervor of the 1970’s settled down, people viewed variable annuity contracts as they should be viewed. Mainly, these contracts are very good for some people and not appropriate for other people. The contracts have definite pros and cons, good in some financial situations and not so good in others, touted by some and hated by others.

Pros of a Variable Annuity

The primary advantage of variable annuities is your ability to invest in equities. Mutual funds containing common stocks have the potential to yield a higher return than CDs or fixed annuities over the long term. These funds can combat the main issue facing retirees, which is inflation.

Variable annuities permit tax deferred asset growth. Investment gains will accumulate tax-deferred until distributions begin.

Variable annuities permit diversification of investments. You can choose from a multiple of different asset classes, each with a different degree of risk. You can be conservative or aggressive with your investments.

A variable annuity is flexible from a tax viewpoint. You can switch funds in your investment portfolio without incurring any taxes or tax penalties.

You have complete investment control over your account. You can direct your own money into any of the investment options that wish. Once you retire, you will have periodic income for life guaranteed by the insurance company.

Cons of a Variable Annuity

The primary advantage of a variable annuity is also its primary disadvantage. Investing in equity or stock investments can cause your retirement nest egg to severely drop. Workers who may not understand stock investing may put their assets into funds which may not be appropriate based on their long term objectives.

Variable annuities are not cheap. There may be administrative expenses, mortality expenses, agent commissions, and investment loads applied to each fund option.

When the annuity stream starts, you are committed. You cannot later request to have all your money back because you changed your mind.

Your guarantee of a lifetime annuity is only as good as the company making the guarantee. Should the insurance company go under, you stand to lose some or all of your income. It is important to choose a strong, highly-rated company.

Be Sure Before You Buy a Variable Annuity

These products are well suited to certain financial planning situations. For example, a high net worth individual may have reached the maximum he can contribute to his tax deferred retirement plans. Yet he still needs another vehicle to invest in equity while deferring taxes. The variable annuity might be his answer.

On the other hand, these products are not suited for a lot of people. For example, a couple near retirement who only have a small nest egg and their Social Security check to meet monthly expenses probably should not be considering a variable annuity. There would just be too much investment risk under the contract.

If you are considering a variable annuity, make sure you know each of the provisions, how the account will perform during good economic times and bad, and what the worst case scenarios are.

Lifetime annuities are the oldest and simplest forms of annuity product in the insurance industry. There is reason they are still around. They work in many, many financial planning situations. The lifetime annuity was originally developed back in the 1800’s to make the retiree’s sunset years secure.

Definition of a Lifetime Annuity

The lifetime annuity is defined by its name. This annuity is an amount payable periodically, usually monthly, for the life of the annuity contract owner. The definition and any modern day derivatives of the name, all apply to the payout period. This annuity may have other payout options such as being paid for the joint lives of the owner and his or her spouse. The annuity may also have some riders attached to the contract such as a minimum amount that will be paid out over the life of the annuity, or a death benefit payable at the end, or the amount of each payment may change periodically. These are all offshoots of the basic annuity which is paid for the life of the contract owner.

Types of Lifetime Annuity Payouts

The original and still most basic payout type of lifetime annuity is the straight life annuity or life only annuity or single life annuity. The annuity is paid periodically for the life of the contact owner and all payments cease at the owner’s death. No death benefit is payable and no continuing payments to a beneficiary. If the annuitant begins to receive payments on June 1 and dies on June 2, all payments cease after the first payment, and the contract is terminated. On the other hand, if a 55 year old starts to receive monthly payments and lives to age 120, the insurance company will make payments until the annuitant is age 120. This type of annuity is simple, clean, and very useful as part of an overall financial retirement plan.

Other types or offshoots of annuity payout options are:

Joint and Survivor Option – periodic payments are made first to the primary annuity owner, and if he or she dies, payments continue to the spouse, if alive, for the remainder of the spouse’s life. The annuity owner may elect up front that 100% or 50% or any amount in between will be continued to the spouse upon the owner’s death.

Term Certain Option – the payments are made for life, with payments made for a minimum number of years as elected by the annuity owner. Most common are 5, 10 and 20 year minimum payment periods. If the annuity owner chose a 10 year Certain, and died after receiving benefits for 7 years, his beneficiary would continue to receive payments for 3 more years.

Installment Refund Option – payments for life and if owner dies, payments will continue to beneficiary at least until the original purchase amount has been paid out

Various combination’s of the above options are available. For example, an annuity owner may purchase a 50% joint and survivor option with a 10 year term certain period. In this annuity, payments are made to the owner, and if he dies, the spouse receives 50% of the former monthly payments. If the spouse should die before the 10^th anniversary of the original payment start date, the 50% payments would then continue to a contingent (2^nd) beneficiary or, if none, the spouse’s estate.

The decision of what payout options to include in the contract depend upon the owner’s objectives, and cost of each option. The options are paid for by the insurance company issuing a reduced monthly payment. When a person contacts an insurance agent to buy an annuity, the agent will have a proposal done which will show all the available payout options, and how much of payment reduction each option will cost.

How and When Does a Lifetime Annuity get Purchased

Lifetime annuities come on either an immediate or deferred basis. An immediate annuity is purchased with a lump sum contribution and periodic payments to the owner begin immediately. A deferred annuity may be purchase in a lump sum with payments to the owner starting sometime in the future or the purchase price may be paid in over a period of time. For example, the most common form of deferred annuity is the owner putting in the entire purchase price, say at age 40, and starts to receive payments when he reaches age 65. If the owner desires to pay for the annuity contract over a period of time, the contract can be designed so that he contributes the purchase price over 10 or 20 years. Then he retires and starts to receive his payments.

Why Would I Want to Purchase a Lifetime Annuity

The main reason you would want to consider a lifetime annuity is for security and peace of mind. The annuity provides stable income for life which you can never outlive.

The lifetime annuity, even with a number of payout options is a simple concept. You do not have to manage investments, or be worried about the stock market, or report interest to the IRS.

In calculating our annuity quote, the insurance company assumes that it will earn interest at some rate in the future for the projected life of the contract. These rates are normally based on the interest rate environment in effect when the quote is done. Thus, annuity quotes reflect current market interest rates. Also, interest rates used in the calculations for immediate annuities are generally higher than CD or Treasury rates.

The tax treatment allows you to defer tax on earnings under a deferred annuity. You will pay tax on the earnings when you begin to receive your periodic payments from the contract.

Your money is very safe. The money you contribute to a lifetime annuity is guaranteed by the assets in the general account of insurer and not subject to the fluctuations of financial markets. This guarantee is not as good as an FDIC guarantee in a bank, but it is very strong.

What are the Disadvantages of a Lifetime Annuity

The primary disadvantage is lack of liquidity. Once the annuity payout begins, you can only receive your periodic payments. If you have some type of financial emergency and need to get your hands on the money you put into the contract, you are out of luck. Payments cannot be altered once they have begun. If you need to take money out of a deferred annuity before the payout has begun, you can do this but you may be hit with a penalty charge by the insurer in the early years of the contract, you will have to pay ordinary income tax on the amount of withdrawal, and you may be subject to a 10% tax penalty by the IRS.

Another disadvantage is lack of investment growth. While you get guaranteed payments under the contract, if you invest the contribution amount in a diversified stock mutual fund rather than in the contract, your principle may grow much more than the interest rate assumed in the annuity calculation. Over a long period of time, a stock market investment should outperform an investment in a lifetime annuity contract. Of course, with the stock market, there are no guarantees.

What to Choose

No financial planner would ever recommend that all assets be placed in one type of investment vehicle, be the stock market, a bank, a lifetime annuity contract. However, there is definitely a place in your financial plan for a lifetime annuity. Having a guaranteed monthly income creates a good base and cushion for the other investments you may wish to make elsewhere.