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Are Annuities Right for You?

Like a Wombat, an Annuity has the ability to dig-in for future safety.
Contact The Niew Group to secure your financial future.
It seems inconceivable that the traditional methods of saving and investing money have become obsolete, but given the turbulent economy of the 21st century, it appears so. The savings accounts and CD’s (certificates of deposit) that once served our parents and grandparents so well for so many years just don’t seem to earn enough interest or offer the flexibility required to keep pace with modern economic times.

If you’re looking for a safe alternative to today’s volatile stock market and want to help ensure your future financial security, one smart way to save money and realize the possibility of significant growth is in annuities.

Annuities are an excellent way to generate a lifetime income, to save for retirement without the worry of market risk and to leave something to your family or a favorite charity after you pass on.

All annuities are written contracts offered by an insurance company. Insurance companies offer this basic definition: “An annuity is the opposite of a life insurance policy—it pays you as long as you live, whereas life insurance pays out when you die.”

Like many financial products, however, what was once simple has become increasingly complicated. Here’s a quick course in Annuities 101, with our usual encouragement to contact The Niew Group for further information about these strong financial tools.

Fixed Annuities

A fixed annuity guarantees that you’ll make a stated interest rate on your money. This type of investment is risk-free—the insurance company which sold you the annuity assumes all the risk and guarantees that you’ll make the stated interest rate. Fixed annuities are not tied to the stock market in any way.

These superior financial vehicles offer complete confidence that your principal cannot be lost, and the benefits of fixed annuities over traditional savings accounts include very advantageous interest rates, often surpassing CD rates as well.

The two major types of fixed annuities are:

• Immediate Annuities – An immediate annuity, also called a single premium annuity, involves making a lump sum, or one-time, payment and then a short time later you begin receiving monthly, quarterly or yearly annuity payments. These payments can be for life or for a specified number of years. Immediate annuities generally appeal most to those who are about to retire or are already retired and who want to generate a safe, consistent income, no matter what.
  
• Deferred Annuities – You purchase a deferred annuity when you want to build up money on a tax-deferred basis and, at some point in the future, use the money that is invested for your ultimate goals. Many use deferred annuities as a way to save for retirement, knowing that they will be receiving a guaranteed return regardless of market fluctuations. When you take the money out in the future, you’ll owe taxes on the earnings that you made with the investment in the annuity.

Generally, you can withdraw up to 10 percent a year from a fixed annuity without having to pay an early withdrawal penalty. You can easily convert money from a deferred annuity to an immediate annuity. You also can leave the money to a loved one or favorite charity free of estate taxes. In addition, annuities have a 30-day free-look period: If you don’t like what the annuity contract stipulates or you simply change your mind, you can return the annuity to the issuing insurance company and receive a full refund.

Variable Annuities

With a variable annuity, you can make either a lump sum (single) payment or a series of payments. The insurance company agrees to make consistent payments to you immediately or at some date in the future. Variable annuities combine the elements of mutual funds, life insurance and tax-deferred retirement savings plans. When you invest in a variable annuity, you can select from a variety of mutual funds in which to invest.

A variable annuity has two phases:

• The accumulation phase: During this phase, you are paying money into the annuity and you have a variety of investment options, ranging from a balanced fund (a type of mutual fund that holds preferred stocks, bonds and common stock to obtain income and growth) to money market funds and international funds. The money that you put in the investment options will increase or decrease depending on the funds’ performance.
  
• The payout phase: During the payout phase, you start to receive payments which can be lump sum, or you can elect to receive payments on a regular basis (monthly, quarterly or annually) for a certain number of years or a lifetime. These payments are guaranteed by the life insurance company.

Variable annuities derive their name from the fact that their returns are unknown or variable. Variable annuities occasionally come under criticism because they generally have two to three percent higher fees than a typical stock mutual fund would have. However, the tax savings are neglected in this criticism. There is no tax levied on either the capital gains or the dividends as they accrue within a variable annuity, and in fact, there is a triple tax deferral to help your investment grow. In other words, you benefit from tax deferral on:

• The interest on the principal
  
• The tax that would have been paid if the money was not in the annuity
  
• The interest on these taxes, which accumulates without being taxed until the money is removed

Finally, variable annuities offer an added advantage in the form of a death benefit which guarantees that if the market is down when you pass away, your beneficiary receives all of the money that you paid into the annuity plus a modest compound interest. Many investors feel that preservation of their heirs’ principal is important enough to make this feature quite attractive.

Indexed Annuities

Indexed annuities blur the line between saving and investing, a combination once thought unlikely. With the current stock market swoon dating back to the one-two punch of the dot-com bubble burst and the September 11th attack on America, new ways of making money were invented. Fail-safe measures were sought to ensure that if a financial catastrophe should occur, there wouldn’t be a loss of principal or interest.

Equity-linked indexed annuities are the “crème de la crème” of annuities, as they offer the safety features of a fixed annuity and the potential higher return of a variable annuity. When you invest in an equity-linked indexed annuity, your money is invested with links to stock market indices such as the S&P 500, the NASDAQ 100 or the Russell 2000, but you are not in the stock market with its inherent risk. You are, however, linked to its higher returns, and you cannot lose your principal.

Equity-linked indexed annuities offer another unique benefit in the form of a “safety floor” which guarantees that if the stock market takes a beating, your annuity investment will keep chugging along and you won’t lose a dime. If the stock market goes into “negative” territory, you might not earn any money until conditions reverse, but you won’t lose any, either. Because these annuities provide safety and a potentially higher return, financial professionals believe they will be the most popular type of annuity continuing through any stock market decline.

Finding the Right Annuity for YOU

We’ve touched on the basics with our snapshot Annuities 101 course, but there are many more benefits and features to be aware of with an investment in an annuity. Once you’ve decided an annuity is the right investment vehicle to incorporate into your overall financial plan, the next step is to evaluate the similarities and differences between the various types of annuities and decide which type is best for you.

For example, all annuities feature these similarities:

• A ten percent penalty-free withdrawal privilege is allowed after the first-year (with rare exception)
  
• The IRS has ruled that any money taken out of an annuity is under the same rules as an IRA. If you withdraw money, and you are under 59-½ years of age, you pay a ten-percent penalty. (There are exceptions to this rule.)
  
• A withdrawal much greater than the ten percent penalty-free withdrawal privilege is allowed in the case of an emergency. These serious emergencies include: terminal illness, nursing home entry, or even unemployment (some companies). Many insurance companies also allow you to take loans from your contract avoiding all possible withdrawal penalties.
  
• They are tax-sheltered—that is, tax deferred, for as long as you allow the money to remain undisturbed. This is a major advantage for the investor, and a good example of how the insurance industry tax advantage is used to create substantial added value for those who invest in annuities.

The Niew Group will provide you with a solid understanding of the three main types of annuities—fixed, variable and indexed—and answer all of your questions about the strengths, advantages and differences between these strong financial tools.

We’ll help you decide whether annuities are the right choice for your customized financial plan. And if they are, we’ll help you choose exactly which type of annuity is best suited to meet your investment and financial needs.

Contact The Niew Group today to learn more about Annuities and how we can add the benefits of this versatile instrument to your financial plan’s “starting lineup.”

The Niew Group can help you Earn it, Keep it, and Grow it.