January
14
2011
Current economic conditions have led to an increase in concern over post retirement income. This concern seems to be spreading across the nation. Many individuals have seen significant declines in their portfolios due to losses in financial markets and others have watched their fixed incomes decline due to lower interest rates on products such as CD and Fixed Annuities. This leaves millions of prospective retirees wondering if they have enough saved to retire or if they will outlive their income in retirement.
Younger individuals fear the social security system is going bankrupt and that high unemployment percentages will lead to reduced benefits in the near future. Many are turning to insurance companies that offer immediate annuities. These products have proven over time to be one of the safest lifetime income components available. More than ever, people are in need of a solution that can provide a lifetime income making immediate annuities the number on choice.
Why is it called an immediate annuity? In most cases the payments start immediately following the purchase of the contract hence the name immediate.
An immediate annuity is a contract between you and an insurance company. You deposit a sum of money into the insurance policy and the insurance company guarantees to pay you a specified income for a specified period of time. Usually payments are for life or for joint lives to protect cases involving married couples. The payments typically start within 30 days of the annuity being issued which means instant retirement income. You can choose your annuity payment term and even elect options that increase your payments for inflation to provide yourself some extra protection during those retirement years.
In situations where you use assets that have a non-qualified tax status you can reduce taxes on the income you receive as well. Immediate annuities have tax benefits that return your principal first and interest second lowering the taxable amount of your payments. Once principal is depleted your payments are fully taxable as ordinary income.
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January
12
2011
There are lots of reasons for investing in annuity. People think that annuity investors are people who cannot take risks, are very cautious, and extremely conservative. While this may be true to some extent, most are not aware of the benefits that annuity owners gain. These benefits include: life long income, low taxed income, safety, steady growth of profits and benefits to the beneficiaries.
Let’s take a moment to look at the benefits of an annuity. When surveyed over 85% of annuity owners purchased it for the tax-benefits. When you invest in a CD you can pay up to half of your income in taxes depending on your tax bracket. On the other hand, an annuity is tax deferred. For your CD to match an annuity that pays a three percent return on investment your CD would have to pay a 6 percent return to match the tax-deferral of an annuity. That is assuming you are in a fifty percent tax bracket.
Safety is often one of the most popular reasons a person purchases an annuity. Fixed annuities have guarantees of principal plus interest that is insured by the insurance provider. Although they are not protected by the FDIC, which covers banks, insurance companies are regulated by the state insurance departments. Insurance companies are required by state laws to maintain certain levels of capital and liability to protect the consumers and ensure they can pay claims. This is the reason an insurance carriers is rated by independent credit rating agencies such as AM Best, Standard and Poor’s, and Fitch. In addition, due to state regulations, insurance companies are mandated by the states to participate in the state guarantee fund to provide additional security and in most states are covered up to $100,000 to $300,000 (as of 1/12/2011).
Financial vehicles such as securities and bank CDs do not promise lifetime income options. However, the annuity provider promises to pay return to the annuitant as long as he or she lives. This is a key feature and one of the reasons that many people invest in annuity. There are many payment options to choose from such as lifetime payments, payments for a fixed number of years, payments for life that increase to cover inflation, and many more. These payment projections which are made by the life insurance company are usually based on interest rates and national life expectancy tables. The most common misconception is that when you die the insurance carrier keeps your money. While that is an option that usually yields a higher income value that is not the only option available. You can have the option to receive a lifetime income and pass more on to your heirs.
The fundamental advantages of investing in annuity include a lifetime income, tax benefits and safety of deposit. With these great benefits you might expect to have to sacrifice the interest earnings however, by investing in annuity you may have higher interest earnings. For example: fixed annuity yields are often at the same interest rate levels as CD’s or bonds and have more benefits. The annuity provider has more leverage to get higher gains on the deposit by investing over a longer period of time. This is why the interest rate offered by annuity is often higher than the interest rates offered by bonds and CDs.
You might have heard that when you invest in annuity your money remains locked up for a long period of time and you cannot withdraw money in emergency situations. In some cases that may be true, but, most annuities allow you to take out 10% of the accumulated assets in the form of a free withdrawal which can be done without the payment of any extra penalties or charges. In most cases after a period of five to ten years the withdrawal charges go away. Any withdrawals taken are subject to ordinary income taxes and you could possibly have to pay IRS withdrawal penalties if you withdraw money from annuity before 59 1/2.
Annuities also offered flexibility to change between annuity contracts without having to pay taxes under the IRS code section 1035. This is what is known as a 1035 exchange and give annuity owners the flexibility to change products if their current annuity is not performing well, does not offer enough liquidity or if the rate drops to low.
Annuity owners do not have to worry that at their death their beneficiaries will have to go through court hassles. This is because annuities have beneficiary designations inside the contract allowing the policy to pay the beneficiary outside of probate court. This is a key benefit for individuals who want to keep court costs low and transfer assets quickly.
Annuity buyers are known for having some of the most diverse portfolios. It is the annuity that is the cornerstone of that portfolio. The annuity offers an array of features and versatility that you could not match with any other mix of products.
January
10
2011
Have you been looking for a safe place to put your money. You like the safety of CD’s but you just can’t help thinking your mattress is better than the bank at rates like 1% and 2%. According to Bankrate.com as of today (January 9, 2011) the national average CD rate is only 2.27%. Wow, assuming you are in a 25% tax bracket and you deposited $100,000 you would have a annual return of $2,270 and $567.50 of that would be taxable. Ouch.
What if I told you you could get a 3.25% and pay no taxes until you take the money out? That’s right we have a 3.25% rate this week and it is tax-deferred. That means that $567.50 per year keeps growing instead of being taxed. That’s an extra 3.25% on the $2,837.5 over the course of 5 years. You would need to get a 4.24% return on your taxable CD to compare to our 3.25% tax-deferred rate.
December
28
2010
Annuities provide great avenues for a person’s security upon retirement as they are the only means by which a person can have a guaranteed flow of lifetime income. People who can’t afford to take risks would find it an intelligible choice to invest in annuities, which may take many forms. Fixed annuities may be highly attractive especially with the minimum rate guarantees that come with them but they usually lie with limited opportunities on growth. On the other hand, there are variable annuities which may also be a good source of income, but there comes an associated risk since payment would depend on the success of investment – thus the term variable. Although there are prospects on some variable annuities with stable returns, the high expenses required could not justify the option.
What an Indexed Annuity Is
There are also indexed annuities which could be the better option for some investors looking for avenues on bigger growth and not for the reason of safety and security. The return rates that come with indexed annuities are more or less tied to a broad stock index such as the S&P500, marking great probability to receive higher returns. The downside risk is alleviated by the fact that the minimum rate never goes down the floor rate. On the other hand, there is also a cap or a limit by which the upside can surge to. To note, there are cases by which the upside can go up to as much as 15%. Thus, this type of annuity forces the insurer to pay regardless of the condition of the stock index.
This potential that goes for the upside goes the same way with income payments, after the indexed annuity is transformed to an income flow that would span a lifetime. Annually, the payout rate is adjusted to show the performance of the stock index, giving good regard to the cap and minimum guarantee.
Although the anticipated returns that can be generated by indexed annuities may not allow for investors to recover their losses in the stock market, these returns allow them to set up financial assets especially when they’d want to retire already. What more, the minimum guarantees would always give any investor the peace of mind he rightfully deserves.
Something which can disturb an investor’s peace of mind would be choosing the right insurer that offers indexed annuities. There are so many product alternatives today that choosing becomes a feat in itself. One must always approach the right insurer in order to get the best deal.
The best person to approach in acquiring indexed annuities would be an independent insurance broker. Unlike company sales agents who may have unhealthy inclinations to their own company, brokers are unbiased and have good access to a variety of annuity products.
However, insurance brokers could not be saved from giving any relative sort of mismanagement or poor service. This is the reason why one should still follow good criteria in choosing the right broker. With the following guide, one is better off in narrowing down options into good ones.
What One Should Find with an Insurance Broker
Selecting a Product
In looking for a good broker, one must review the companies affiliated with the broker. The number of companies would never tell of a broker’s credibility. It is the names of the companies that do. The companies must be of good standing, upholding financial prowess and stability. If you see that a broker is under a lot of mediocre-quality companies, then that would give him substandard reputation. On the other hand, if the best companies are affiliated with him, you would know that he is an exceptional find.
Credentials and Experience
The best broker would find a product which falls to be the most appropriate with an investor’s situation. The length of time of service may mean one thing, but the qualifications would always be the best standpoints in looking for a good broker. Brokers actually have the chance to augment their career by taking credentials such as CFP, CLU, and ChFC from schools like the American College. These credentials would mean that these brokers are quite adept and prepared in putting up the best product for every investor.
In order to get information from brokers first hand, one should interview them and establish a good data of their credentials and assets. If you know what to inquire for and if you are good in talking, you would know if a broker has the real capabilities and is not like a routine insurer doing the same thing for all his clients. A good broker would delve much on an investor’s situation and would ask of the needs, primacies, likings, and risk tolerance before going into a discussion about any product. If a broker greets an investor with a product brochure, then he just might be a good waste of time.
Client-centered
Last, do not hesitate asking for references. All brokers are rightfully compensated by their companies so they should feel the desire of earning an investor’s business. A broker should know that he is being assessed and that decisions must be well made. With the mentioned guide above, one is saved from wasting his time and will actually find it easier to look for the best product suitable for him.
December
28
2010
Retiree’s have been using annuities as a planning tool for many years and without a doubt annuities offer some of the greatest benefits for retirement and income planning. There are various kinds of annuities available which include Immediate annuities, fixed rate annuities, indexed annuities, and variable annuities. We are going to discuss mainly two types when tackling the split annuity strategy. Although you can use a mix of these annuities in this strategy it is easiest to explain using the immediate annuity and the fixed rate deferred annuity. A fixed rate deferred annuity offers accumulation of a fixed interest rate of a specified period of time. An immediate annuity provides and income stream for a specified period of time. The split annuity concept is a combination of the two over a mutual period of time. A deposit is split mathematically between the immediate annuity and the deferred annuity in order to generate an income while preserving the principal. The major advantage of this strategy is to lower taxes on the income produced.
As stated earlier split annuity is a combination of both annuity strategies. The return gained from this annuity is tax efficient. By opting for split annuity; you gain the advantage of steady return and accumulation of return. Steady return is gained from the amount of money invested in immediate annuity and accumulation of return is a part of deferred annuity. The accumulated return; in case of deferred annuity equals to the originally deposited amount. Once the tenure of these annuities is over; the money can be reinvested and the program can be restructured.
Example:
A client deposits $200,000 in a split annuity program. $64,887.16 of this total deposit is applied toward an immediate annuity and $135,112.84 is applied towards a deferred annuity. This client gains an income of $632.36 each month from the amount deposited in the immediate annuity and distributed over a period of ten years. On the other hand, the client gains a return of 4% on the amount of money deposited in the deferred annuity. The rate of return is accumulated on an annual basis and is available at the end of 10 years for full withdrawal. This accumulated return is equal to the original deposited amount of $200,000. After the period of 10 years is over, the amount can be reinvested as determined by an updated split annuity program.
The investor gains a fixed amount of return each month from immediate annuity package. The return does not change according to varying market conditions.
Due to what is known as the annuity exclusion ratio taxes are significantly lower. In this example over 85% of the income is excluded on the tax return. In addition, Social Security income is not affected by the amount of return gained on the investment of split annuity.
You do not have to continue with the same annuity schedule after the initial term of investment is over. You can reschedule the program according to your needs. You can even take 10% of the deposit from split annuity and no additional charges are applied to this withdrawal.
The successors and beneficiaries of a split annuity package even gain benefit. They gain additional death benefits in case of death from deferred annuity investment. Returns from immediate annuity package are even offered to the beneficiary.
Split annuity program keeps your capital secure and you constantly gain from tax efficient income for the mutually agreed period of time. In case of deferred annuity; your return equals to the amount of your initial deposit of capital.
Understanding the concepts of immediate and deferred annuity programs is very difficult. Due to this; you might even face difficulties while understanding the process of split annuity program. While investing in split annuities; you have to take many factors into consideration. You have to separately calculate the amount you are going to invest in immediate annuity and different annuity. Once you have made the calculation; you can freely enjoy the various benefits provided by split annuity. With the help of split annuity; you keep on getting income to meet day to day expenses and your capital keeps on increasing. This way; you and your successors are financially secure.