Annuities
An annuity is a type of contract between an individual and an insurance company that can help to provide for additional income in retirement via a combination of investment and insurance features. Depending on the type of annuity, the contract may be able to complement other retirement plans by providing an option for guaranteed lifetime income, tax-deferred growth, flexible withdrawals, and a legacy protection for your beneficiaries. However, it should be stressed that any guarantee of income is subject to the financial strength and the ability of the issuing insurance company to pay claims.
When purchasing an income annuity, your contributions become a guaranteed income stream either for life or for a specific period of time. An income annuity may be a good option if you are seeking a guaranteed, steady stream of income that you will not be able to outlive. At an additional cost to you, income annuities may also be able to offer a cost-of-living adjustment that will increase the amount of income every year in order to better hedge against any possible inflationary risk. Two main types of income annuities are: single premium immediate annuities and deferred income annuities. The income of a single premium immediate annuity begins, as the name suggests, “immediately”. Meanwhile, the income of a deferred income annuity does not begin for at least 13 months after your last premium payment. However, you do have the option to defer income by up to 40 years. Deferred income annuities often come with an optional cost-of-living adjustment for either living or death benefits. For income payments, the premium amount will initially be smaller than other policies but will increase each year by the chosen percent. Otherwise, if applied to the death benefit, a deduction from your premium will be made in order to pay for the guarantee that the optional benefit will provide. It is worth noting that the purchase of either a single premium annuity or a deferred income annuity is irrevocable. Meaning that you generally cannot surrender the annuity in exchange for a contract value.
Common Types of Annuities
Variable Annuity
A Variable annuity is a long-term investment for retirement that can help protect your income from market volatility, provide for tax-deferred growth potential, and may also include guaranteed death benefit options. At an additional cost, most variable annuities offer an optional guaranteed lifetime withdrawal benefit (GLWB) that can provide a protection of lifetime guaranteed income for yourself and your spouse. Variable annuities offer the benefit of helping individuals reach their retirement goals while maintaining their standard of living well into retirement.
However, a few potential drawbacks of variable annuities are the charges associated with them. These charges can include insurance fees (payment for the guarantees that the insurance company promises), surrender charges (early withdrawal or cancellation fees), investment fees (for the management of the underlying security options), and fees for optional benefits such as death or living. Withdrawals from an annuity typically reduce the value of the annuity and withdrawals of taxable amounts are subject to ordinary income tax. Additionally, withdrawals made prior to age 59 ½ may be subject to a 10% Federal tax penalty. Moreover, the performance of the underlying invest options within the annuity is of course subject to market fluctuations and are therefore not guaranteed.
Fixed Indexed Annuity
A fixed indexed annuity provides for principal protection, guaranteed lifetime income, and the opportunity for investment growth based on either a fixed interest rate or an interest based on the performance of an external index. However, interest is tax-deferred. At an additional cost, a fixed indexed annuity may also offer an optional guaranteed lifetime withdrawal benefit (GLWB) that can provide a protection of lifetime guaranteed income for yourself and your spouse. An optional death benefit is also typically offered.
A few potential drawbacks of these contracts are the possible associated early withdrawal or surrender charges. Withdrawals made prior to age 59 ½ may also be subject to a 10% Federal tax penalty. In general, if any withdrawals that exceed 10% of your account value are made in a given year during the initial guaranteed period, they can be subject to withdrawal charges and/or a market value adjustment.
Fixed Deferred Annuity
Fixed deferred annuities provide for guaranteed asset growth at a predetermined rate for a fixed time period. Growth is tax-deferred which helps you enjoy investment growth without having to pay taxes during the accumulation phase. Additionally, you normally have the option to choose guaranteed income, which would be income for life or for a specific time period. A fixed deferred annuity may be a good decision if you do not anticipate on needing access to funds for a number of years and yet are not willing to lose principal on.
A few potential drawbacks of these contracts are the possible associated early withdrawal or surrender charges. Withdrawals made prior to age 59 ½ may also be subject to a 10% Federal tax penalty. In general, if any withdrawals that exceed 10% of your account value are made in a given year during the initial guaranteed period, they can be subject to withdrawal charges and/or a market value adjustment.
How do I purchase an annuity?
Each of our advisors at Florida Financial are knowledgeable on the different types of annuities available and can help guide you to make sure an annuity is the right choice for you. Contact us today for a free consultation.
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Helpful Resources:
- Annuities as Insurance:
Why Are Annuities Considered an Insurance Product - Annuities Basics Video:
What is an annuity?
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