Are you in the process of finalizing your financial plans for retirement? You may be exploring ways to generate income, minimize risk and pay for health care costs. As you likely know, a broad range of financial tools and products are available to help you achieve those goals.
An annuity is one potential tool to consider. Annuities are often used to generate income, minimize taxes, manage risk and more. There are several types of annuities, but most fall into one of two categories: immediate and deferred.
In an immediate annuity, your initial premium is immediately annuitized, or converted into a stream of income that’s guaranteed by the insurance company. For example, you may contribute a lump sum and, in return, receive a monthly payment for the rest of your life.
While immediate annuities are useful in specific situations, many individuals prefer deferred annuities. In a deferred annuity, your premium isn’t immediately converted into income via annuitization. Instead, your premium has the opportunity to grow inside the annuity. At some point in the future you can annuitize the value, take withdrawals or leave the funds to your beneficiaries.
Not sure whether a deferred annuity is right for you? Confused about how they work? Below are a few common questions and answers about deferred annuities. If you’re interested in learning more, contact a financial professional, who can help you determine whether a deferred annuity is right for your needs.
How do funds grow inside a deferred annuity?
One of the appealing features of a deferred annuity is that your funds have the ability to grow on a tax-deferred basis inside the policy. How they grow depends on the type of annuity you have. There are several different types of deferred annuities, but the three most common are fixed, variable and indexed.
A fixed annuity is one in which your growth comes through the accumulation of interest that’s paid by the insurance company into the policy’s cash value. The interest rate is usually fixed for a predetermined period of time, such as one, three or five years. After that period is over, the rate may float. However, most policies have a guaranteed minimum interest rate. In fixed annuities, there is no risk of principal loss.
A variable deferred annuity is one in which your funds are invested in subaccounts, which are similar to mutual funds. Your growth is based on the performance of your investments. In most variable annuities there is some risk of loss. However, some policies offer optional features that provide some level of downside protection.
Finally, there are indexed annuities, which often blend elements of both fixed and variable policies. In an indexed annuity, you earn interest, but the interest rate is linked to the performance of investment markets. If a market’s index performs well, you may get more interest. If it performs poorly, you get less. However, you never lose money in an indexed annuity, even if the market has negative returns.
What are the fees on a deferred annuity?
There’s a common perception that annuities are high-cost investment tools. However, this often isn’t the case. Deferred annuities do usually have surrender charges. These are penalties that are paid if you surrender your contract or take a sizable withdrawal during a specified surrender period, usually the first few years after you open the policy. However, you only pay the surrender penalty in those instances.
Fixed and indexed annuities often have little or no fees outside of surrender charges. Variable annuities may have fees, but that’s true of many similar investment products. In a variable annuity, you can often choose from multiple features and benefits to adjust the cost.
How do I take income from a deferred annuity?
You can create income from a deferred annuity in a variety of ways. One option is to annuitize the contract value. The insurance company uses the contract value, your age and other factors to calculate a monthly payment guaranteed for the rest of your life.
The other option is to take systematic withdrawals. This may be preferable to annuitization, because withdrawals don’t require you to sacrifice your contract value. Some policies even have additional options that guarantee your withdrawals for the rest of your life.
Ready to learn more about whether a deferred annuity is right for you? Let’s talk about it. Contact us today at Focus Financial Group. We can help you analyze your needs and identify the right strategies. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
Annuities are insurance products backed by the claims-paying ability of the issuing company; they are not FDIC insured; are not obligations or deposits of, and are not guaranteed or underwritten by any bank, savings and loan or credit union or its affiliates; are unrelated to and not a condition of the provision or term of any banking service or activity
Guaranteed lifetime income available through annuitization or the purchase of an optional lifetime income rider, a benefit for which an annual premium is charged. Annuities are long-term, tax-deferred vehicles designed for retirement and contain some limitations.
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John Stover is a Registered Representative of and offers securities through TCM Securities, Inc. members FINRA & SIPC
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