Choosing an Annuity
As with any financial decision, choosing an annuity means making tradeoffs. For example, the fixed-rate deferred annuity that offers the highest interest rate may only credit that rate for one year. However, an annuity with a lower initial interest rate may credit it for ten years. Interest rates, length of any guarantee period, and other features often widely vary. Each deferred fixed-rate annuity offers you a different set of terms, so you are likely to find a plan to meet your personal needs. When shopping for an annuity, Questions to Ask Before You Decide:
Answers to These Questions:
What will the interest rate be?
The initial interest rate is the rate your money earns from the day the insurance company receives your first premium until the end of a specified period, which varies by contract. The initial interest rate period is, not surprisingly, the length of time during which you will earn the initial interest rate.
Compare plans to find the right balance of factors for your needs. You might want a plan with a higher initial interest rate, even if you will earn that rate for a shorter period of time. Perhaps you prefer a plan with a longer initial interest rate period, even if it pays a lower initial interest rate. You may want to take a slightly lower initial interest rate in order to have a lower surrender penalty. The more lenient surrender penalties, the greater flexibility you will have to withdraw funds. Your individual situation and personal retirement goals will determine the relative value of these factors.
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Do I want to contribute qualified or non-qualified funds to my annuity?
Qualified funds are funds on which you have not yet paid income tax. For example, a traditional Individual Retirement Account (IRA) is purchased with qualified funds. Other funds, such as contributions to a 401(k) plan and pension or profit sharing plans, are also qualified funds.
If you are just starting a traditional IRA, you may want to think about using a qualified flexible premium deferred annuity. If you are dissatisfied with your current IRA, it's easy to roll over your existing IRA funds into a new qualified deferred annuity.
If you change employers, don't pay tax penalties by cashing in your 401(k) or other pension benefits; Put those funds into a qualified deferred annuity of your choice.
Non-qualified funds are funds that have already been taxed, such as regular wages or salary. The amount of qualified funds you can save each year is limited, but the amount you can contribute to non-qualified annuities in unlimited.
To achieve your retirement dreams, consider establishing a non-qualified deferred annuity.
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How much do I want to contribute to the annuity?
The amount you contribute depends on two main factors:
- How much money you can put in, both now and in the future.
- How much money you ultimately want to take out.
Only put money into a deferred annuity that you do not expect to need until you retire, barring a major emergency. Remember that there will be taxes and possibly other penalties for early withdrawal (before you are 59+). Obviously, the more money you put in, the more you will get out. Only you can determine how much you want to save today in order to fulfill your dreams in the future.
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How frequently do I want to contribute to the annuity?
You have two options for contributing premiums to your annuity: single premium or flexible premium.
Single Premium means that you establish your annuity contract with one contribution (called a premium). You cannot make additional contributions to that annuity, but you can purchase additional annuities.
Flexible Premium means that you can contribute additional premiums after your initial premium. As long as you contribute at least the minimum amount defined in your contract, you can usually make these contributions at any time for any amount. The flexible premium may be ideal if you want to make regular additions to your contract, much like adding to a savings account.
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When do I want my benefits to start?
Your benefit payments can start on just about any date within twelve months of the date you purchase your annuity. Normally, the insurance company needs at least four weeks to process your application and set up the benefit payments. When you buy a deferred annuity, you put off -defer-your benefits until a future date of your choice.
You may want to put off receiving benefits until you are in a lower tax bracket -- perhaps after retirement. At this time, you can cash out your annuity for a lump sum, and use some or all of this amount to ensure that you have an income for life, by buying an immediate annuity. To avoid paying tax on the funds you use to buy an immediate annuity, you need to do a Section 1035 (a) Exchange. Please call a Customer Service Representative for assistance. You may also annuitize your deferred annuity with your existing insurance company (convert it into an immediate annuity).
Please note: Qualified annuities require you to start taking the minimum required distribution from your annuity by April of the calendar year following the one that you reach age 70+, or the calendar year in which you retire, whichever date is later.
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How frequently do I want to receive my benefit check?
You can receive your benefit checks once a month, once a quarter, twice a year or once a year. Most people decide to receive their benefit checks once a month, provided that the amount of the check they will receive exceeds the minimum payout level established by the insurance company. The usual minimum is $100. The benefit payment can be made by check, and be payable to whomever the owner has designated. If desired, the benefit checks can also be deposited directly into a bank account.
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What if I want to take my money out before the end of the surrender penalty period?
Most plans allow a penalty-free withdrawal of up to 10% of the premium or annuity's value, once a year. There is no surrender penalty on these withdrawals. However, if you want to take out more than the penalty-free withdrawal amount or more than one withdrawal in a given year, you may be subject to a surrender penalty. The surrender penalty period is the length of time during which surrender penalties are charged.
The penalties or fees the insurance company charges on surrender during the penalty period are usually a percentage of the amount you withdraw in excess of the penalty-free withdrawal amount. Terms for these penalties widely vary from plan to plan. You could also be liable for taxes and a 10% tax penalty that the IRS imposes on funds withdrawn before you are 59+.
In certain situations, surrender penalties may be waived.
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Do I want to receive benefits for life?
Some immediate annuities have a period certain or guaranteed-payment period, which is a specific length of time during which benefit payments will be made. While you can choose a guaranteed period for your plan, most annuities are paid for the lifetime of the annuitant. Unless the owner provides for guaranteed payments for a certain period by adding a "period certain" clause to the life-only annuity, payments stop when the annuitant dies.
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What benefits do I want paid to my spouse if I die first?
Although a lifetime annuity on only one annuitant generates the highest regular benefit payment, most married couples want the annuity payments to the surviving spouse to continue after the first death. In order to do this, they name themselves joint annuitants. After one of the annuitants dies, the annuity benefits can continue at the same level or at a reduced level to the surviving annuitant.
When establishing the annuity, some owners stipulate that the benefits decrease by a certain percentage after the first death. This increases the benefit while both are alive and recognizes that one can live more cheaply than two. For example, instead of a level $1000 per month while one or both annuitants are alive, they can possibly receive $1200 per month while both are alive and $700 per month, thereafter.
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When does the contract end?
Many deferred annuity contracts have no predetermined end. They continue until you decide to begin withdrawing funds. Some annuities, however, specify a maturity date, such as age 85 or 90.Your money, along with the interest you have earned through triple compounding, continues to grow until you decide to take it out, or until the contract matures; at which time you have several options.
You may choose to cash out the entire annuity at once. This is called surrendering the annuity. Or you can set up regular benefit payments for whatever period of time you wish. This is called annuitizing the annuity. You may also arrange for another person to receive the annuity proceeds after you die.
The regulations for qualified plans dictate that you start receiving a minimum distribution by April of the calendar year following the one that you reach age 70 +, or the calendar year in which you retire, whichever date is later.
To learn more about immediate annuities that are available to you and/or to receive a quote, call our Customer Service Representative toll free at (888)-822-LIFE (5433) |
