Annuities

One major advantage of an immediate fixed annuity is the security of a guaranteed income. You can count on those regular monthly payments. If returns on other investments diminish–because of a fall in interest rates or a stock market slump–your annuity payments remain steady.

Offsetting this advantage is if interest rates are down when you purchase your annuity, your monthly payments will be less and may not keep up as easily with inflation. Is there a way to offset this situation?

First, realize that once your immediate annuity begins, it is irrevocable. You cannot change your mind; there’s no lump-sum repayment provision (there are a few companies that offer commutation–the ability to get your principal back at a discount). So, shop for the best deal when you buy.

The amount of your monthly annuity check is based on the size of your investment, your age, and what the insurance company estimates it will earn on their contract with you. But realize, too, that the monthly payment on the same size investment can vary significantly from company to company. Get several different proposals to ensure you are getting a good deal.  Do not let anyone rush you into making a purchase. The consequences are permanent. Check out a company’s rating from Standard & Poor or A.M. Best & Company. You will be counting on those monthly payments for quite a while.

Now, if you are ready to buy an annuity but interest rates seem historically low, you might consider laddering your annuity investment to take advantage of hopefully higher interest rates in the future.  To do this, simply take the total amount of money you have set aside for purchasing an annuity and divide it evenly into several amounts.  Purchase an annuity with the first amount now according to prevailing interest rates and the best deal you can find. Then do the same with the remaining amounts spread out over the next five or six years.  This is referred to as “laddering annuities” or an “annuity ladder.” Hopefully interest rates will ratchet up for your later purchases. 

You can in fact purchase all of the annuities today to create your annuity ladder.  The first one, which will start the payments immediately and the other will be deferred annuities.  After the first year, you will convert deferred annuity “A” into an immediate annuity (i.e. you will annuitize the contract).  After 2 years, you will do the same with annuity “B” and so on.  Or, maybe you do this at 5 year intervals pictured like this

You could be better off with a higher average rate among them than if you had purchased one annuity when interest rates were low.  Of course, if interest rates seem historically high today, you’re best of by getting all of your funds into an immediate annuity and locking in a high lifetime payment.

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Perhaps you are considering investing in a deferred annuity to use later in your retirement as a form of longevity insurance. You may want to look into the annuity company’s annuity rate renewal history to make your choice. Two seemingly identical deferred annuities can offer you the same terms but may produce decidedly different annuity rates at renewal time. Let’s see why.

A deferred annuity comes under jurisdiction of your state’s department of insurance unlike their variable versions. This limits the annuity company’s investment options to support its deferred annuity offers for the assurance that such an insurance product will give. Regulations require most of its investments to be in bonds.

Exploring your potential deferred annuity choices, you may find two companies offering an attractive deferred annuity with the same terms. Each annuity has the same initial annuity rate, the same minimum annuity rate guarantee, the same surrender charge, and lastly the same withdrawal features. But, of course, after the initial annuity rate time has expired, each company will substitute a renewal rate according to its own investment discretion. What determines that?|

The earnings from an annuity company’s portfolio depends on the mix of investments (mostly bonds but also mortgages and real property) on the bonds’ quality and average maturity. Both of these relate to risk and therefore affect their yield. More risk generally means higher yield and a higher annuity rate for the investor. 

The higher the quality of the annuity company portfolio, the less is the risk of default. Lower risk bonds offer comparatively lower interest rates. Time itself carries risk. Bonds with a longer time to maturity generally offer higher yields than short maturity bonds.

Companies that fund portfolios of higher risk receive higher yields and hope they do not suffer the risk consequences involved. They can afford to pay higher overhead expenses, offer higher annuity rates to their customers, or take larger profits for themselves. It’s their choice, albeit at a higher risk to their annuity policy holders.

As an example, let’s see the affect of bond portfolios with different average maturities held by two companies which offer the same deferred annuity. We will hypothetically assume they both are yielding 6% and other things are equal. 

The table above shows that Company A with the longer maturity is trapped under rising interest rates to offering the 6% annuity rate renewal; but under falling interest rates it can happily maintain the 6% annuity rate.  The short maturity Company B must buy to replenish its portfolio. But it necessarily has to offer whatever the prevailing rate moves to … for better or for worse.|

It’s possible that some companies may offer a high ‘teaser’ initial annuity rate, only to make any associated losses up with decidedly lower renewal rates.  A quick review of renewal rate history may help you decide which company will give you the biggest overall return for your investment.

The post provided by Javelin Marketing

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Retirees want to secure their future financial status. Fixed annuities can play a big part. Let’s consider how fixed annuities can help individuals and families create a future supplemental retirement income.

While fixed annuities provide several benefits in the form of increased rate of growth in savings through tax-deferred growth, competitive returns, and security (through various guarantees) they also offer another important benefit– insurance against financial instability. You can invest as much as you want in a fixed annuity, leave it there to grow as per the rate of interest promised to you, and withdraw money when you need it. Lastly, you have several choices about how and when to withdraw your money.

Here are several benefits that contribute to stability:

1.      A fixed annuity is often an appropriate choice for seniors because it offers the promise of a steady income when annuitized. Buy ‘term certain’ fixed annuities if you want to collect income over a particular time period only. Or buy a life annuity if you want to receive income for your entire life.

2.      Several fixed annuities offer special features that can be useful for seniors. You can receive systematic or flexible withdrawals. This gives you the freedom and pleasure of creating your own “pension.”

3.      Every fixed annuity provides a principal guarantee, so you can be assured of receiving at least the initial premium you paid (less potential surrender charges or other costs).

4.      You may choose a nursing home waiver feature. This would relieve you of paying surrender charges if you fall sick at any time during the annuity period where you are required to cash in your annuity to pay for your nursing home bills.

Note that the amount of “payback” you receive when you annuitize depends the amount you have invested, as well as on your life expectancy. But be vigilant about all the details of the annuity contract before you sign. Note that fixed annuities once annuitized cannot be surrendered for value.  Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59½ are subject to a 10% penalty.  Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims-paying ability of the insurance company. Fixed annuities should be considered long-term investments. Riders such as nursing home waivers may have additional costs.

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Qualified deferred annuities carry significantly different contribution, withdrawal, and tax regulations compared to non-qualified deferred annuities. Know these differences to choose which type you should use.

An deferred annuity is a contract you make with an insurance company to grow your principal and then if you choose, to receive as series of payments–usually for life –in return for your ‘premium’ contributions. You can purchase either a fixed deferred annuity or a variable deferred annuity.

An deferred annuity has two phases: accumulation and annuitization. During the accumulation phase, you contribute premiums that are invested for growth. You receive your series of payments during the annuitization phase (you may also choose to make your withdraw in a lump sum).

Nonqualified Deferred Annuities
Earnings within a deferred annuity–like those of a life insurance contract–are not taxed as long as they stay in the deferred annuity.  Taxes on these earnings are deferred until they are withdrawn. But if you withdraw any earnings before 59½, the IRS imposes a 10% penalty–in addition to any other income tax and contract fees that may be imposed.

Contributions during the accumulation phase are unrestricted. You can pay in equal payments, an immediate one-time payment, or any other amount you wish. There are no limits but all contributions are made with after tax money.  You could begin your annuitization payments as late as you like. Many insurance companies may require you to begin at 85, but that is up to the contract. You pay tax only on the earning’s portion of each payment.

Qualified Deferred Annuities
Qualified annuities are regulated by the same tax benefits and restrictions of other qualified plans like IRAs.   The table above compares nonqualified to qualified annuities.

The main additional benefit of a qualified deferred annuity over a nonqualified annuity is the use of pre-tax contributions.  However, yearly contributions are limited. For 2008, it is $5,000 ($6,000 if you are 50 or older) with a phase out of the deductibility at high incomes if you have a qualified plan at work.
Also IRS regulations force annuitization to begin in the year you turn 70½ with payouts that satisfy the minimum required distribution (MRD) of qualified plans.  The full payout of a qualified deferred annuity is taxed as ordinary income since only pre-tax contributions funded it.

Transfers or Rollouts into Qualified or Nonqualified Annuities
You can use a qualified deferred annuity to receive a rollout of an IRA or 401 (k), or other ‘pre-tax’ retirement plan.  You would only use an nonqualified annuity if you had first paid taxes on funds you rolled out of such a plan.

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There is no such thing as a Medicaid annuity. Annuities can however help some people shelter assets so that they can qualify for Medicaid long term care benefits. The reader is encouraged to consult an elder care attorney to understand the laws that apply in his state. Medicaid rules vary from state to state, so the following discussion is a general discussion of federal rules that impact the use of annuities for Medicaid planning.

Some retirees have concern about paying for ill health (long term care) in later years. One strategy is to exhaust one’s assets and then qualify for Medicaid support. Understandably, most people are not eager to exhaust their assets. When it comes to counting your assets to determine Medicaid qualification for long term care benefits, properly structured annuities may be an exempt or non-countable asset and can be retained by the person who also gains Medicaid benefits. But that annuity must meet the following criteria:

1. It must be an immediate annuity or deferred annuity that is now being annuitized

2. The guaranteed payments must be for the life of the owner, or term certain shorter than the owner’s life expectancy

Annuity agents often refer to annuities that meet the above criteria as “Medicaid annuities.”

While the state Medicaid authority will generally not force the person opting for Medicaid to liquidate the annuity (as they would with cash or other countable assets), the annuity payments that the person receives will be taken by the Medicaid Authority to offset its outlay of supporting the ill person. So how can you come out ahead using a Medicaid annuity?

Let’s take the hypothetical case of Mrs. Johnson, age 80, who buys an immediate annuity with a refund provision. Her investment is $100,000 and she has no other assets. The refund provision says that if she does not recover her $100,000 investment before she dies, payments will continue to her heirs. Thus, the annuity potentially allows Mrs. Johnson to transfer assets to her heirs that would have normally been exhausted on her long term heath care.

But some states have moved to curtail this practice. For example, in Pennsylvania, the purchase of an annuity that fails to name the state as remainder beneficiary “for at least the total amount of medical assistance paid on behalf of the annuitant” is treated as a transfer, and causes a period of ineligibility for Medicaid benefits. In other words, that state basically says that if someone dies with an immediate annuity, the State will get paid back for the money it spent on the annuitant’s health care. If the annuity owner has failed to name the State as a beneficiary, the State will treat the purchase as a transfer. Transfers of assets within five years of applying for Medicaid benefits will cause the applicant to be ineligible for Medicaid benefits for a period of months based on the size of the transfer.

The bottom line: this method of sheltering assets using Medicaid annuities may be viable in some states and the implementation of Medicaid eligibility rules vary from state to state. Get proper advice from a qualified professional.

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Stability and safety are important to many seniors, and these are only two of the reasons why immediate annuities are popular retirement income choices. A check arrives every month and part of the annuity income is considered a tax-free return of your principal. As long as the immediate annuity company is financially sound, the payments will continue for the life of the contract (annuities are guaranteed by the claims-paying ability of the issuing company).  You can get an estimate of monthly income using the immediate annuity calculator.

However, consumers sometimes believe that immediate annuities are illiquid, irreversible investments, and cannot provide for future lifestyle changes. Nonetheless, there are some immediate annuities with options that may add flexibility to your financial plan.

Immediate annuities can possibly include an option that would allow you to receive extra cash at specific anniversary dates. For example, this might be at the 5th, 10th, or 15th anniversary of your investment. Exercising this option will reduce your current payments (the distribution may be fully taxable, so consult with your tax professional).

Suppose you needed money to cover an emergency, like paying for caregivers or a home repair. Some immediate annuity companies will let you take up to six payments at once. You would not, however, receive checks for the following six months (payments may be fully taxable so consult with your tax professional).

You may also have the ability to provide a cash benefit from your immediate annuity to your heirs. This would be a pre-determined percentage, such as 25% or 50% of the amount of your initial investment. Selecting this option will reduce your monthly annuity checks and may have tax consequences.

Another option, immediate annuity commutation, allows you to cash in the remaining “balance” on your immediate annuity at a discounted buyout.  Yet another option insures that all of your principal is recovered for your heirs in the case you pass away before you personally recover your entire premium.

Immediate annuities can provide a lifetime income you cannot outlive and also provide flexibility of which few consumers are aware.

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