- Atlanta, GA
Menu
Annuities are financial products that provide a stream of income in retirement. They can be purchased through insurance companies and offer options like fixed annuities and index annuities. Annuities provide a guaranteed income source during retirement and can be a valuable addition to your retirement planning.
An annuity is a financial product typically offered by insurance companies or investment firms. It involves a series of payments made at equal intervals over a period of time. Annuities are often used as a means of providing a steady income stream during retirement or for long-term financial planning.
Our agents are your advocates, we are an independent insurance broker who has no pressure to place business with a particular carrier. We have access to over 30 annuity carriers, more than anyone in the business.
Annuities can be funded with either a lump sum payment or through a series of payments over time. They’re often used as part of retirement planning to supplement other sources of income, such as Social Security or pensions. It’s important to carefully consider the terms, fees, and potential tax implications before purchasing an annuity, as they can be complex financial products.
The difference between the two is how much your principal will earn. With a fixed annuity, you are guaranteed compounded returns based on a simple interest rate. With an index annuity, your rate of return will vary with the market index it is linked to.
Both fixed and indexed annuities can provide the average person with a safer way to build their retirement savings while protecting those funds from a downturn in the market.
Additionally, both can provide a steady, lifetime monthly income, allowing clients to plan their retirement more clearly. But, how do fixed and indexed annuities differ and when should you sell a recommend one over the other? We’ll gladly explain.
Let’s start with the basics. By and large, fixed annuities are very straightforward and easy to understand.
A fixed annuity is a contract between the client and the insurance company that guarantees both the principal and the rate of return on your client’s investment. Similar to a bank CD, fixed annuities are very low-risk investments that are not affected by the ups and downs of the stock market.
A fixed annuity can be immediate, like single-premium immediate annuities, or deferred. Immediate annuities allow the client, or annuitant, to begin receiving payments the month after they open the annuity. Conversely, deferred annuities postpone the annuitant’s payments until a future date to allow time for growth of the principal.
The most important benefit of fixed annuities is that they typically provide much better interest rates than bank CDs and can provide lifetime payouts after retirement. Interest rates for fixed annuities remain the same for the full length of the contract, and the interest earned is tax-deferred until payments begin.
The most basic feature (and biggest benefit) of an annuity is that you receive regular payments from an insurance company. These payments provide supplemental income during your retirement and can help if you’re afraid that you haven’t saved enough to cover your regular expenses. Keep in mind that the value and number of your annuity payments will vary depending on the type of annuity you have and the terms of your contract.
The money that you contribute to an annuity is tax-deferred. That means you can contribute money before you pay taxes. You won’t owe taxes on the money until you start receiving payments. During the time between when you contribute funds and when you withdraw them, it’s possible that your money could grow significantly. This type of growth is similar to how 401(k) contributions grow.
The insurance company will invest any money that you put into an annuity. There’s always a certain level of risk involved when you invest money. However, any contract you sign for a fixed annuity should include certain guarantees to prevent you from losing money. Fixed annuities guarantee that you make a certain percentage of your principal investment. That percentage is usually quite low, but it does mean that you’ll earn more than the amount of your original investment.
A death benefit is a payment that the insurance company will make to a beneficiary if you die. The death benefit payment is typically either a specific pre-determined amount, or the remaining value of the annuity contract.
An index annuity is a type of annuity that typically provides the contract owner an investment return based on a formula linked to the change in the level of one or more published equity-based indexes, such as the Standard & Poor’s 500 Composite Stock Price IndexTM (S&P 500), which tracks the performance of the 500 U.S. largest publicly traded securities.
An index annuity provides a guaranteed minimum accumulation value and may also offer death benefit protection as well as a variety of payout options, although it is possible to lose money when investing in an index annuity. These products are designed for investors who want a protected investment floor with the ability to partake in the benefits of a market-linked vehicle. The index used, the formula that determines the index rate, and the guaranteed minimum value can vary among the company and product selected. Some of these include:
The method used to measure the change in the underlying index (e.g., point-to-point or annual reset). Example: If the underlying index equals 1,000 on the date of purchase and equals 1100 on the first anniversary date of purchase, then the change in the index (1,100 – 1,000 = 100) divided by the index value at purchase (1,000) equals 10%.
The percentage of the calculated index gain credited to the contract owner as interest, which may be reset annually. Example: If the participation rate is 90%, then a 10% change in an index would result in a 9% credit (90% x 10% = 9%).
The percentage by which the gross index gain is reduced before being credited to the contract owner as interest. Example: If there is a 2% spread or margin, then a 10% change in an index would result in an 8% credit (10% – 2% = 8%).
The maximum index-based interest credited to the contract owner, which may be reset annually. Example: If there is a 6% cap, then if the underlying index increased by 10% in a year, the credit to the contract would only be 6%.
The amount you receive on an index strategy end date is based on the index return and the index strategy.
The step-up / trigger rate is a rate of return for an index segment that is typically declared at the beginning of the index term and is used to determine the segment maturity value if the index return for the index term is zero or positive. If the index value is greater than or equal to zero on the end date, the performance rate is equal to the step-up / trigger rate. If the index value is less than zero on the end date, the segment value will be equal to the invested premium in that segment or the stated limited protection for that segment. As performance rates will vary by insurance company and contract, please review the disclosure documents for the particular index annuity you are considering
Indexed annuities offer their owners, or annuitants, the opportunity to earn higher yields than fixed annuities when the financial markets perform well. Typically, they also provide some protection against market declines.
The rate on an indexed annuity is calculated based on the year-over-year gain in the index or its average monthly gain over a 12-month period.
While indexed annuities are linked to the performance of a specific index, the annuitant won’t necessarily reap the full benefit of any rise in that index. One reason is that indexed annuities often set limits on the potential gain at a certain percentage, commonly referred to as the “participation rate.” The participation rate can be as high as 100%, meaning the account is credited with all of the gain, or as low as 25%. Most indexed annuities offer a participation rate between 80% and 90%—at least in the early years of the contract.
If the stock index gained 15%, for example, an 80% participation rate translates to a credited yield of 12%. Many indexed annuities offer a high participation rate for the first year or two, after which the rate adjusts downward.
Most indexed annuity contracts also include a yield or rate cap that can further limit the amount that’s credited to the accumulation account. A 7% rate cap, for example, limits the credited yield to 7% no matter how much the stock index has gained. Rate caps typically range from a high of 15% to as low as 4% and are subject to change.
In the example above, the 15% gain reduced by an 80% participation rate to 12% would be further reduced to 7% if the annuity contract specifies a 7% rate cap.
In years when the stock index declines, the insurance company credits the account with a minimum rate of return. A typical minimum rate guarantee is about 2%. Some can be as low as 0% or as high as 3%.
Many variable annuity contracts offer “living benefit” guarantees. For an additional cost, the contract holder may be able to purchase guarantees regardless of the account value.
Adding a guaranteed minimum withdrawal benefit to a variable annuity contract could allow the contract owner to withdraw a fixed percentage (usually 5% to 7%) of the premiums paid until 100% of the premiums paid had been withdrawn, even if the contract’s underlying investments were to lose money.
A guaranteed minimum income benefit could help ensure that when the contract owner is ready to collect retirement income payments, they would be based on a minimum payout base even if poor market performance lowers the value of the underlying investments.
A guaranteed minimum accumulation benefit could help ensure that the contract value will not fall below a specified minimum after a specified term. The minimum is usually equal to the premiums paid.
Simple to fully underwritten policies with all the extras that we can show you