what is annuity?

The Fixed Annuity

A fixed annuity is an interest-based vehicle comparable to a bank-originated CD but aimed toward retirement savings. Usually, a lump-sum of cash locks in a 3-10% interest rate for 3-15 years. Their chief shortcoming -- penalty assessments from the IRS and the insurance corporation -- is a noteworthy component only with premature withdrawal.

Benefits

• Little risk
• Greater liquidity than CDs
• Tax-deferred
• Usually higher returns than bonds, CDs, treasuries, or money market accounts

Drawbacks

• Revenue withdrawals prior to the age of 59.5 are levied a 10% tax penalty by the IRS.
• Growth remains tax deferred, however eventually earnings are taxed at ordinary income tax rates.
• The insurance corporation typically imposes a penalty if withdrawing more than the yearly allotment.
• Additional monies cannot be attached to the same annuity agreement (however added contracts may be procured).

The Variable Annuity

A variable annuity is similar to a 401 (k) -- you decide the make-up of your portfolio. The premium can be separated into subaccounts and invested into market segments of differing risk.

Advantages

• Sound establishment of affluence for your heirs
• Tax-deferred increase
• Principal and interest certain
• Avoidance of probate for your heirs
• Increased death benefit
• Market-related rewards minus the downside risk

Drawbacks

• Income withdrawals earlier than the age of 59.5 are assessed a 10% tax penalty by the IRS.
• Growth is tax-deferred, although ultimately earnings are taxed at ordinary income tax rates.
• Dissimilar to fixed-rate vehicles, variable annuities may decline in value.
• The insurance company generally imposes a penalty if withdrawing more than the annual allowance.
• Several variable annuities incur a 1-3% yearly management charge.
• A $ 25-35 annual fee given to the insurance corporation to cover administrative overhead.

The Indexed Annuity

An equity-indexed annuity (or fixed indexed annuity) is a style of tax-deferred annuity whose credited interest is coupled with an equity index, normally the S&P 500. It assures a minimum interest rate (normally between 1% and 3%) and can participate in a measure of market expansion.

Advantages

• Gains linked to the market
• Minimum assured rate
• Low risk
• Offered for short, medium, or long term (1-10 years)
• Tax deferment
• Unrestricted contributions
• Life insurance (discretionary)
• Yearly tax-free gifts of up to $13,000 per party

Drawbacks

• Taking out revenue earlier than the age of 59.5 produces a 10% IRS tax penalty.
• Although tax-deferred at first, revenue is ultimately taxed at ordinary rates.
• Certain index annuities cost a 1-3% yearly management payment.
• Withdrawals exceeding the annual allowance sustain an insurance firm penalty.
• Revenues contract when withdrawn too soon.

The Fixed-Annuity "Resale"

fixed annuity resales are fixed annuities marketed by individuals. (Normally, a resold annuity is a lotto winner's annuity payout, a litigation or structured settlement, or even a conventionally gotten fixed annuity.) For whatever reason, the initial holder of the annuity opts to give up the annuity in exchange for funds today.

To attract a buyer for his fixed annuity, the holder needs to discount the annuity. For illustration, say the initial holder is receiving a 4% preset return on his annuity. Through offering the annuity at a significant markdown, he generates a prospect for a purchaser to achieve a considerably better yield percentage -- frequently approximately between 6% and 9%.

Fixed annuities have remained one of the securest investments in history. Babe Ruth positioned a considerable amount of his capital in fixed annuities before the 1929 Stock Market Collapse. Thanks to those annuities, he retired easily in the middle of the Depression.

Advantages

• Higher-than-normal yields
• Annuity value unaffected by variations in interest rates
• The purchaser is sheltered by both the claims-paying power of the life insurance firm and via state legal reserve pools

Drawbacks

• Typical holding duration is 5 to 15 years.
• Subject to interest-rate risk, like all investments.

Things to Examine

• Make positive the annuity is from a leading insurance company with a superior score from AM Best or other ranking bureaus.
• Employ a bank trust company to confirm a safe transaction.
• Be sure that you get a closing book and that a lawyer reviews all the papers to safeguard you.
• If the annuity is life-contingent, make positive that the financial establishment contains a term life contract on the seller and that you are the beneficiary. This signifies that if the seller of the annuity dies, you obtain all the disbursements from the annuity and the proceeds of the term-life contract.

The Pension "Resale" -- an Annuity Alternative

Comparable to annuity resales, pension resales are pensions sold by individuals. Again, the process necessitates that a term life insurance contract be written on the seller with the buyer as the beneficiary.

The pension procurement involves a closing book and a lawyer. A bank trust firm normally administers the transaction. The pensions are typically from large firms, the federal government, the military, and a few additional organizations. State and municipal pensions are not marketed since they are not believed secure.

Pension resales are mostly very safe. The pensions are supported via the Pension Benefit Guaranty Corporation, a federal agency.

Benefits

• Normally 7 to 9% gain -- better than CDs or other fixed investments
• No changeability in value
• Backed by term-life policies to safeguard the buyer. If the seller dies, the buyer secures all the disbursements plus the initial investment repaid.

Drawbacks

• Not liquid
• Long wait time (for instance, 10 years) for the purchaser to receive all the payments.
• The purchaser could sell it at a future date but would be subject to a discount on the transaction.
• Interest-rate risk. If rates go up, the fixed rate may not keep up with higher interest rates.

Items to Investigate

• Avoid pensions from states, municipalities, and smaller or struggling enterprises.
• Seek pension resales that are from Federal government pensions, military pensions and key corporation pensions with a secure fiscal position.
• Make sure an attorney is utilized for the closing and that the pension resale is overseen using a bank trust company.
• Be certain there is a term life policy that elects the buyer the beneficiary.