Fixed-Indexed Annuities and Equity-Indexed Annuities
An Indexed annuity is a type of annuity that grows at the greater of a) an annual, guaranteed minimum rate of return; or b) the return from a specified stock market index (such as the S&P 500®), to a maximum annual return.
In addition, a guaranteed Living Income Benefit may be elected.
Most importantly the principal is 100% guaranteed.
Fixed vs. Fixed-Index Annuities
Technically speaking, fixed-indexed annuities are a type of fixed annuity. But a fixed-indexed annuity is different than a standard fixed annuity in the way that earnings are credited to the annuity. For a standard fixed annuity, the issuing insurance company guarantees a minimum interest rate. The focus is on safety of principal and stable, predictable investment returns. With fixed-indexed annuities, the contract return is the greater of a) an annual minimum rate, or b) the return of a stock market index (such as the S&P 500®). If the chosen index rises sufficiently during a specified period, a greater return is credited to the owner’s account for that period. If the stock market index does not rise sufficiently, or even declines, the lower minimum rate is credited. Never is the account credited with a negative return.
The contract Guarantees that the Principal is 100% Guaranteed.
Participation / Index Rates
The participation rate, also known as the index rate, is the percentage increase in the index by which a contract will grow. For example, if the chosen market Index increases 35%, and the contract has a 12% cap, the increase will be limited to that percentage. Some contracts do not have a cap rate. The cap varies depending on the length of your term.
Floor & Cap Rate
The floor refers to the minimum guaranteed amount credited to the account. The cap rate is the annual maximum percentage increase allowed. For example, if the chosen market index increases 35%, and the contract has a 12% cap, the increase will be limited to 12%. Some contracts do not have a cap rate. The cap varies depending on the length of your term.
Index Credit Period
There are three basic ways in which amounts are credited to an owner’s contract at specific points in time. The three most common ways to determine credited amounts are as follows:
· Annual reset: This measures the change in the market index over a one-year period.
· Point-to-point / term: Similar to the annual reset, but the period is usually five years.
· Annual high water mark with look back: The highest anniversary value is used to determine the gain.
Fixed Annuity Guarantees are subject to the claims paying ability of the issuing life insurance company. Therefore, it is very important that you check the latest financial strength ratings of the insurance company before investing any money. As a rule of thumb, look for an A rating or better with A.M. Best, AA or better with Standard and Poors, AA or better with Fitch, and Aa3 or better with Moody’s. Annuity FYI can furnish you with the latest financial strength ratings upon request.
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Paul Stawinski is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. CLU Wealth Advisors is not an affiliate of Lincoln Financial Advisors Corp.
Mr. Stawinski is securities licensed in Alabama, California, Colorado, Connecticut, Florida, Indiana, Maine, Massachusetts, New Jersey, New York, North Carolina and insurance licensed in Alabama, Arizona, California, Colorado, Florida, Hawaii, Indiana, Louisiana, Massachusetts, Maine, Maryland, New York, New Jersey, Ohio, Rhode Island, Pennsylvania, Tennessee, Texas, Vermont & Virginia. If you are not a resident of these states we are unable to offer our services.
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Timing of payout -- immediate or deferred: In an immediate annuity, the investor begins to receive payments immediately upon investing. This is for investors who need immediate income from their annuity. In a deferred annuity, the investor receives payments starting at some later date, usually at retirement.
Investment type -- fixed or variable: Fixed annuities are invested primarily in government securities and high-grade corporate bonds. They offer a guaranteed rate, typically over a period of one to ten years. Variable annuities enable you to invest in a selection of sub- accounts, and include many varied investment options
Liquidity options: Most annuities allow you to withdraw either your interest earnings or up to 10% per year without a penalty (although any withdrawal from an annuity may be subject to taxes and an additional 10% federal tax penalty if taken prior to 591/2 years of age). Most annuities have a surrender charge for a number of years -- a penalty for making an early withdrawal above the free withdrawal amount.
We provide Independent advice on Investment Insurance Opportunities, as well as Benefits and Retirement Planning
Fixed Tax Deferred Annuities
Fixed tax deferred annuities are invested primarily in government securities and high-grade corporate bonds. They offer a guaranteed rate, typically over a period of one to ten years,. They give the investor payments starting at some later date, usually at retirement. You can invest either a lump sum, or make periodic payments. Those funds grow tax-deferred until you’re ready to begin receiving payments.
There are two basic types of fixed tax deferred annuities: Guaranteed Return Annuities (GRA) and Market Value Adjustment annuities (MVA). The GRA offers a guarantee that you can never receive less than 100% of your investment -- no penalties or fluctuations in the interest rate market can impact your principal should you surrender. A GRA will sometimes offer a one-year interest rate guarantee. The other type of fixed tax deferred annuity is the Market Value Adjustment annuity (MVA). This annuity works much like the GRA, but there is no guarantee of your principal if rates rise and you surrender your contract. MVAs work like a bond and often pay more than a GRA due to the increased short-term risk of rising rates.
Some indexed annuity contracts offer, as an optional feature at an additional cost, a guaranteed death benefit. If an annuitant dies before annuity payments begin, the contract will pay the named beneficiary the greater of the investment in the contract (less any withdrawals), as well as the bonus amount credited at time of initial purchase. This can increase the payment at Death by 10%
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A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses.
The exact terms of the annuity are contained in the contracts and any attached riders, endorsements and amendments, which will control the issuing company’s contractual obligations.
Income taxes are due upon withdrawal and if withdrawn before age 59½, an additional 10% federal tax may apply.
There is no additional tax benefit for contracts purchased in an IRA or other tax-qualified plan, since these are already afforded tax-deferred status.
Variable annuities are long-term investment products designed for retirement purposes and are subject to market fluctuation, investment risk, and possible loss of principal. Variable annuities contain both investment and insurance components and have fees and charges, including mortality and expense, administrative, and advisory fees. Optional features are available for an additional charge. The annuity’s value fluctuates with the market value of the underlying investment options, and all assets accumulate tax-deferred. Withdrawals of earnings are taxable as ordinary income and, if taken prior to age 59½, may be subject to an additional 10% federal tax. Withdrawals will reduce the death benefit and cash surrender value.
What is an annuity?
An annuity is a contract between you and an issuer, whereby you agree to give the issuer principal and in return the issuer guarantees you fixed or variable payments and tax deferred accumulation over time. While annuities are not insurance policies, they are issued by insurance companies.
Annuities are designed for retirement and can be used for a wide variety of objectives. They can also be used for Non Qualified needs, like any other investment or brokerage account. For example retirement accounts and College aid qualification. However with the added benefit of tax efficiency and financial aid qualification. In addition they can be used to provide investments of Qualified assets, IRA and 401k rollovers, as well as other Pension accounts. An annuity is similar to a retirement plan that you can fund it in a lump sum or a little at a time, and all capital in an annuity grows and compounds tax-deferred until you begin making withdrawals. Unlike retirement plans, there is no limit as to how much you can invest in annuities!
The large number of annuity products on the market today can make selecting the most suitable annuity a little confusing. But in fact, there are only a handful of different types of annuities. When selecting an annuity you will be presented with essentially three choices: