Annuities

Rebates, longer-term financing, and other temptations are often used by automakers to get you to buy or lease a new car.  But these complications obfuscate how much you really pay in financing costs.  Along a similar line, fixed annuity companies frequently have incentives to reward you for investing. One of the most widely used is the “bonus rate.” But if you aren’t careful, you might not get what you bargained for.  Bonus rates look good at first buy may cloud your ability to see what you really earn.

The bonus annuity rate is generally given during the first year or few years that you own the fixed annuity and can significantly enhance the initial return. Furthermore, the bonus increases the annuity’s principal on which future interest will be credited. Therefore, a bonus could possibly boost the overall yield over the contract’s term.

However, the company may be offering this reward because you are expected to keep the contract for up to 10 years. If you remove your investment before that time is up, you may be hit with surrender charges that could more than wipe out the bonus you had received. Additionally, some annuities with high bonuses may not have features that might be valuable to you, such as waiver of surrender charges for terminal illness, or nursing home confinement.

The return on your investment is certainly important, and a bonus can be a valuable addition. But don’t overlook the financial safety of the annuity company, the other benefits that annuities can offer, and how well the advisor proposing the investment understands your complete financial situation. 

Since you are often locked in b y surrender charges, after the bonus period, the annuity company may drop your rate to an uncompetitive annuity rate for the remaining term.  Assume this worst case and calculate your return to maturity and compare the same calculation to an annuity that does not offer a bonus rate but may offer a multi year guarantee.

Note: Bonus annuities often have higher fees and charges than annuities that do not offer a bonus. Furthermore, the surrender period is usually longer, leading to higher surrender charges.

Bookmark It

An annuity is an investment which an individual makes to ensure a lifetime income. There are different types of annuities. These are Indexed annuity, variable annuity, fixed annuity, immediate annuity, deferred annuity and retirement annuity.

Equity Indexed annuities grow depending upon the performance of an underlying stock market index. It is a good source of investment if the stock market is in an upward cycle. In an indexed annuity the principal is guaranteed and the profits are locked in. As a result investors do not lose their money. The annualized rate of return for these kinds of products can be anything between 5% to 9%.  The best time to invest is when the stock market is depressed.

A variable annuity allows an investor to grow investments in portfolios. This is one of the most preferred methods of annuity investments because the money is invested in conservative stocks and the payments are tax deferred. Investors can choose the method of payouts. The expected rate of return for variable annuity is 8% to 10% assuming equity accounts are selected.

Fixed income annuities come with a time frame of 5 to 15 years. This type of annuity is more suited for conservative investors to ensure that their principal is guaranteed. The insurance companies which manage the fixed annuities place the funds in government securities or in bonds of stable companies. At present rates one can expect a return of 4.5% on an investment of $100, 000 but check rates with your retirement advisor as many companies pay more.

Another form of annuities that is gaining popularity is immediate annuities because of the aging population. As the name suggests an investor in these annuities start gaining on their investments as soon as it is made. The rate of return on immediate annuities depends on many factors such as age, gender, investment amount, and type of payout.

The next type of investment in annuity is deferred annuity. In this arrangement, the investor benefits from tax benefits on the investments made.  The withdrawals from a deferred annuity are made after retirement to enjoy the golden years of one’s life.  The returns from deferred income are taxable. A fixed deferred annuity will give a steady rate of return. Investors can choose the mode of investment in the arrangement-either as a lump sum or payments made over time. The rate of return of a deferred income arrangement will depend on the investment corpus, starting age of the investment and whether the payout is in a variable or fixed mode.

The most common and oldest rate of annuity is retirement annuity. People invest in these types of investment vehicles to ensure that they get a steady return after their retirement.  Retirement annuities are offered as an option at retirement, as settlement of a pension payout.  In this type of instrument, investors can choose between a fixed return and a variable return. 

Investors have been investing in annuities to safeguard their future incomes. The annuity rate of return can be lesser than other investments such as equities or foreign exchange. However they will always remain as one of the the favorite retirement options of retirees to ensure long-term returns and stability.

Bookmark It

An annuity is an investment which an individual makes to grow principal and optionally insure a lifetime income. There are different types of annuities with different annuity rates. These are Indexed annuity, Variable annuity, Fixed annuity, Immediate Annuity, Deferred Annuity and Retirement annuity. Equity Indexed annuities grow depending upon a predetermined annuity rate or any stock market index. It is a good source of investment if the stock market is in an upward cycle. In an indexed annuity the principal is guaranteed and the profits are locked in. As a result investors do not lose their money. The annualized rate of return for these kinds of products can be anything between 4% to 9%.  The annuity rate of return is typically higher than a traditional fixed annuity.

A variable annuity allows an investor to grow investments in portfolios. The annuity rate of return is not fixed. This is one of the most preferred methods of annuity investments because the money is invested in conservative stocks and the payments are tax deferred. Investors can choose the method of payouts. The expected rate of return for variable annuity is 7%-10%.

Fixed income annuities come with a time frame of 5 to 15 years. This type of annuity is more suited for conservative investors to ensure that their principal is guaranteed. The insurance companies which manage the fixed annuities place the funds in Government securities or in bonds of stable companies. At present rates one can expect a return of 4.70% on an investment of US$100, 000 for a 15 year rate of return. Another form of annuities that is gaining popularity is Immediate annuities. As the name suggests an investor in these structure start receiving payments on their investments as soon as it is made. The rate of return on immediate annuities depends on many factors such as age, gender, investment amount, and type of pay-out.

The next type of investment in annuity is deferred annuity. In this type of a arrangement the investor benefits from tax benefits on the investments made.  The withdrawals from a deferred annuity are made after retirement to enjoy the golden years of one’s life.  The returns from deferred income are taxable. A fixed deferred annuity will give a steady rate of return. Investors can choose the mode of investment in the scheme. The rate of return of a deferred income scheme will depend on the investment corpus, starting age of the investment and whether the payout is in a variable or fixed mode. The average rate of return that an investor can expect from a deferred annuity is between 3%-5%.

The most common and oldest kind of annuity is retirement annuity. People invest in these types of investment vehicles to ensure that they get a steady return after their retirement.  In this type of instrument, investors can choose between a fixed annuity rate and a variable return. Investors can also roll their investments in 401Ks, IRA and other CD’s into a retirement annuity. Investors have been investing in annuities to safeguard their future incomes. The annuity rate of return can be lesser than other investments such as equities or foreign exchange. However they will always remain as the favorite investment vehicle to ensure long-term returns.

To check current annuity rates, consult the immediate annuity calculator and the fixed annuity calculator.

Post provided by Javelin Marketing

Bookmark It

If you bought a fixed deferred annuity a few years ago, you may be looking at the end of your initial annuity rate guarantee, and the renewal annuity rates could be lower than they were when you first made the investment.  Some fixed annuities leave you no option other than accepting the current one-year rate, or transferring the annuity to another one so you can lock in a new, long-term annuity rate guarantee.    

However, a one-year annuity rate lock may not be such a bad idea. You could earn a reasonable return and wait until next year to see where interest rates have gone before deciding to renew for another year, or explore other options.  

If your contract surrender period has ended and the renewal annuity rates are low, the annuity company might offer you a new multi-year (usually five to 10 year) annuity rate guarantee period. This could be their way of trying to keep your business rather than lose you to another insurance company. You could, however, possibly face a new round of surrender charges by doing this.  (Surrender schedules and rates vary among companies.)

It might also be time to take money from your annuity through annuitization (payments over a fixed period or life) or annuity withdrawals of interest.
    
Fixed annuities are designed for long-term investors. Ordinary federal income taxes and a 10% tax penalty often apply to annuity withdrawals and surrenders taken prior to age 59½. However, you can consider “exchanging” your annuity to another company for an annuity that offers a better renewal rate history or more multi-year rate guarantee options. Assuming that all requirements of Internal Revenue Code §1035 are satisfied, you can exchange your old annuity and you will not owe any federal income taxes or penalties on the exchange.  Surrender charges could still apply depending on your existing contract’s terms. Therefore, you would want to consider the comparative fees, surrender charges, and surrender schedules of the contracts prior to making an exchange for a higher annuity rate.   

Before you make any changes, review your company’s annuity rate renewal history. This will show you the rate that the company paid past clients as their renewals came due. You need to ask for this. This could also indicate how well the company paid its existing annuity holders as compared to the annuity rate it paid to attract new investors.    

If you are not clear on the renewal options you might have on your annuity, you can check Comparative Annuity Reports to see the annuity rates that various companies pay. You may also want to look at annuities that lock in the rates for the entire contract term. This way you will know where you’re going to be at the end of the fixed-rate guarantee period.  (All annuity rates and guarantees are subject to the insurer’s claims-paying ability.)

Bookmark It

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

Bookmark It