Understanding how annuities work and choosing the right kind of annuity are the key parts of protecting your money from market losses. At First Benefits Group, Inc. one of our missions is to protect our client’s assets from risk. Therefore, we do not work with Variable Annuities. Except for a brief description of variable annuities, the information contained herein will specifically address Fixed and Fixed Indexed Annuities.
Annuities are contracts with an insurance company which make a series of income payments at regular intervals in return for a premium or premiums you have paid. Most often annuities are purchased for retirement income. Only annuities can guarantee income payments to last as long as you live.
Annuities are valued by adding the premiums paid less any applicable charges, plus the interest credited. This value is used by the insurance company to determine the amount of the benefits that you can receive from the contract.
A deferred annuity also has tax benefits. The interest earned is tax-deferred as long as it is not paid out. Once the payout period begins, earnings will be taxed.
There are three main types of annuities.
Fixed
With a Fixed Annuity, your money (less any applicable charges) earns interest at a rate determined by the insurance company which is spelled out in the annuity contract. This means that the insurance company guarantees it will pay no less than a minimum rate of interest. Once the payout period begins, the amount of each payment is set and will usually not adjust.
Fixed Indexed (FIA)
A fixed indexed annuity is an insurance product where you can store your money and have it grow at a guaranteed, fixed interest rate or at a potentially higher rate based upon a portion of the performance of an outside index, such as the S&P 500 index.
Variable
A Variable Annuity is an investment. Your premiums are invested into separate accounts and you choose how much risk you wish to take by selecting from stock, bond or other accounts that have no guarantees and are subject to market loss, or a fixed account with a minimum guaranteed interest.
During payout, your income may be fixed (set at the beginning) or variable (changing with the value of the investments in the separate accounts).
Most fixed index annuities have two phases. First, there’san accumulationphase, during which you let your money earn interest. This is followed by a distribution or payout phase, during which you receive money from your annuity.
A fixed index annuity also guarantees you will receive at least the minimum guaranteed interest credited to the contract. Remember that all these guarantees are backed by the claims-paying ability of the issuing company.
With a fixed index annuity, you defer paying taxes on your contract’s interest u8nbtil you receive money from the contact. Tax-deferred interest means the money in your contract can grow faster.
Your principal and bonus are never subject to market index risk. A downturn in market index(es) cannot reduce your contract values.
Contract Value
The money you put in the annuity becomes the initial contract value. The only way that the contract value can go down is if you withdraw money from the annuity, so let’s assume you make no withdrawals. Even if every financial market in the country plummets, your contract value stays exactly the same. It doesn’t decline.
Also, depending on the time commitment you are willing to make, some carriers offer products with a premium bonus that can be credited to your contract value as well. Currently, available premium bonuses can range from 5% to 11% of the amount that you put into your annuity.
Then, the annuity credits interest, typically annually, on contract anniversaries. There is an index upon which interest crediting is based, and if that index goes up, interest is credited, and once it is credited, it becomes a protected part of the contract value as well.
As anything is added to the contract value, whether it is the initial premium, any subsequent premiums, any premium bonus, or any subsequent interest credits, they are all contractually protected from loss due to fluctuations in the associated index by the issuing carrier. That’s what makes fixed indexed annuities so attractive and so safe.
If you are like many investors who wish to reduce or eliminate volatility, or are looking for a guaranteed minimum rate of return, fixed annuities are a great option.
Here are the top five reasons Fixed Annuities may be an alternative for your hard-earned money:
Safety
Fixed annuities can ensure that if anything should happen to you, your surviving spouse has a source of continued income in place.
This can help in case of a catastrophic illness or if you or your spouse needs to enter a nursing home.
Liquidity
Today’s volatile and challenging economy has heightened interest in liquidity.
Many people may hesitate to make long-term financial commitments without having flexibility and access to their funds, including creating an income stream should they need it.
Tax deferral
The tax benefits of fixed annuities offer yet another positive attribute.
Because earnings will not be taxed until withdrawals are made or regular distributions start, fixed annuities provide the benefit of triple compounding: earning interest on principal, interest on interest, and interest on tax savings!
Control
Another appealing aspect of fixed annuities is the ability to choose a predictable income stream.
Lifetime income options allow the fixed annuity owner to have control over the payment options that are guaranteed to continue for the duration of their life.
Peace of Mind
Fixed annuities are a great avenue for providing security to loved ones in the event of a death.
Annuities can help an estate avoid probate, allowing beneficiaries to receive annuity proceeds without delays and probate expenses.
Summary
Annuities are not right for everyone. At First Benefits Group, Inc. we follow a specific process to determine whether a fixed annuity is a potential option for each client. For more information on our process, please visit our Financial Services page.
For more information on Fixed Annuities or an appointment to discuss your personal situation, please contact tobrien@firstbenefits.net or 941.361.3057 x4.
A term life insurance policy can protect you and your family over the years. However, life circumstances can shift, making it challenging—even impossible—to maintain the policy. Unfortunately, many individuals faced with this situation simply allow their policy to lapse, forfeiting the premiums they’ve invested.
But there’s a better solution: reach out for assistance! Our term life insurance rescue program offers valuable options, including residual benefits or straightforward solutions. Whether you’re unable to sustain the policy or no longer wish to keep it, Terry, our dedicated life insurance specialist, is here to provide information. Call Terry at 941-361-3057 ext. 4
