What exactly is an annuity, and when would it be an appropriate purchase? An annuity contract is purchased from an insurance company. Most often, it is used as a vehicle for saving for retirement or to guarantee an income for life. An annuity is often used for special savings plans that are provided by some employers, such as:
- Tax Sheltered Annuities (TSAs), (salary reduction plans for employees of public schools and non-profit organizations),
- Simplified Employee Pensions (SEPs).
Do you have money to invest as a result of any of these situations:
- A lump sum distribution from a pension plan?
- An inheritance?
- The sale of a home or business?
- Extra liquidity now that your children are grown?
If any of these situations apply and your goal is long term savings, an annuity may be an appropriate part of your portfolio. There are four very different types of annuities which fall into the categories of deferred annuities and immediate annuities.
Deferred annuities are long-term investment vehicles used for retirement savings. They allow people to accumulate money without paying current income tax on their earnings. This means that the amount can grow faster, due to the tremendous power of compound interest.
There are two types of deferred annuities — fixed and variable and there are expenses and fees associated with both. Fixed annuities pay a fixed rate of interest. Variable annuities offer the choice of several investment divisions, which are subject to market risk and may fluctuate in value.
Fixed Deferred Annuities
Fixed Deferred annuities are viewed as secure investments by many people, since the insurance company that offers the annuity and its claims -paying ability guarantees the current cash value plus a future guaranteed interest rate. Today, they often offer interest rates that are comparable to (or higher than) CDs, along with the added benefit of deferring taxes on the earnings until they are withdrawn* (unlike annuities, CDs are FDIC insured). CDs are typically used for short-term savings needs, while annuities are used for long-term savings such as retirement.
Fixed Deferred annuities, unlike many other fixed interest investments, contain guarantees of minimum future interest rates. All fixed annuities have a minimum rate of guarantee that specifies the lowest rate the insurer can offer. Some contracts also offer a "bailout" provision that allows the owner to withdraw money from the annuity without surrender charges if the crediting rate falls by more than a specific amount.
* Withdrawals may be subject to regular income tax and if made prior to age 59 1/2, may be subject to a 10% IRS penalty.
Variable Deferred Annuities
These annuities usually offer a choice of several investment divisions that have the same or similar risks and as the stock market. The owner may select how to allocate the policy's cash value and is able to transfer money among these investment divisions.1 A variable annuity may offer investors opportunities for higher potential growth than is usually available with a fixed interest investment, accompanied by the additional risk inherent to variable products.
1 This policy is not designed as a vehicle for marketing timing.
For investors who seek professional fund management and asset diversification, but who prefer to defer immediate income tax on their gains, a variable annuity may be a possible solution.
An unusual feature found only in variable annuities is the guaranteed death benefit.2 The value of a variable annuity death benefit is guaranteed never to be less than the total of the premiums paid, less any loans, withdrawals, and surrender charges associated with any withdrawals.
To obtain a copy of the prospectus, please contact your NYLIFE Securities LLC Registered Representative, or call 1-800-598-2019. Investors are asked to consider the investment objectives, risks, charges and expenses of the investment carefully before investing. Both the product prospectus and the underling fund prospectuses contain this and other information about the product and underlying investment options. Please read the prospectus carefully before investing.
2 Death benefit payments are dependent upon the claims-paying ability of the issuing company and do not apply to the investment performance or the safety of the underlying investment divisions in the variable annuity.
While deferred annuities are designed to help you maximize savings, immediate annuities are there to make sure your savings provide an income for as long as you need it. Immediate annuities, as the name implies, begin paying you an immediate income and last for a specific time period that you select. They are often designed to pay as long as you live. These annuities are commonly used to provide pension benefits to retired employees.
The benefit of an immediate annuity is the consistent and stable income it provides. You know that a check for a specific amount will be received on a regular basis and that the income will continue for as long as you have requested. You can even arrange for an annuity to pay for as long as you or your spouse lives. This last option is called a Joint and Survivor Annuity.
Are There Any Risks With Annuities?
As with any investment, there are some risks that you should be aware of. With a fixed annuity, since the insurance company is guaranteeing the value of the annuity, you must make sure that the company is backing its promise with sound investments. If you select a well managed and highly rated company, you will have a secure investment that offers attractive rates of return.
Since there are so many types of annuities, selecting the proper type can be very confusing. Should it be fixed or variable immediate or deferred? The answer depends on your own situation.
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