Annuities

Retirees often want to know how quickly they can get to their money in case they need to cover extraordinary expenses such as a medical emergency, or a home or auto repair. This need for liquidity may cause them to avoid deferred annuities. However, when you look closely, you’ll see that annuities can possibly provide access to funds that can accommodate many circumstances.

For instance, what if you need to take out money before the deferred annuity matures?  Most companies will let you remove a portion of your account’s value each year without paying a withdrawal charge. This is usually 10%, and once the surrender charge period expires, you’ll be able to withdraw as much as you want without paying any penalties to the issuer. But annuities also can allow for other circumstances.

Suppose you are worried about money for future long-term care or a medical emergency? Some annuity companies will give you penalty-free access to your funds if you have to go to a nursing home or come down with a critical illness. 

And what about income from your deferred annuity?  If you reinvest, the income is not reported on your tax retyrn and in fact, may help lower the tax you pay on your social security income.  This is a welcome senior tax break.

If your situation changes and you need income from a deferred annuity, you will have the opportunity to annuitize the contract and receive payments for a fixed period. You can also get payments that will last your lifetime or even as long as you and your spouse live. Once you annuitize the contract, the annuity is not counted for Medicaid qualification purposes (the income could be, however).

What happens when you die? Will your survivor get the money he or she might need?

The annuity company will transfer the account’s value to your designated beneficiary without any surrender charges, penalties, or probate fees.

Do you think that there is a chance that creditors might come after your money? Many states’ laws protect annuities from creditors.

So before you decide that deferred annuities don’t offer the ease of access that you might need to your funds, look at the complete picture. Examine what you might need this money for—what situations would you consider potential emergencies? It’s possible that an annuity company has just the right option for you.

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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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Qualified deferred annuities carry significantly different contribution, withdrawal, and tax regulations compared to nonqualified 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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