Introduction
If you were to ask four different people about annuities, you might get four different opinions or answers, why because there are four different types of annuities and each person maybe commenting each, on a different type of annuity. Annuities are an asset class and like any asset class, every asset class has its advantages and disadvantages. Annuities, like all financial products, have a certain place. Annuities are not for everyone, or for every situation. Annuities are generally designed for folks over the age of 50, that are retirement minded and that plan to retire after the age of 60. This annuity decision guide is a resource for you, to help you find the best annuity for you. This decision guide is not meant to offer legal, financial or tax advice, but to be in a general fashion, bring clarity to what the benefits of annuities are, specifically the benefits that fixed index annuities (FIA’s) can bring to you. This resource is not about any annuity carrier or any particular annuity carriers’ products. The annuity you select may have features; this resource guide does not describe. For specifics, consult your agent, who specializes in these areas.
The Common Traits of all four types of Annuities:
But to shed light on FIA’s, we must first show the similarities and differences between/of all the other types of annuities. There are four types of annuities, which will be more outlined in the next sections.
In looking at the four types of annuities, let’s first look at what makes them similar. Let’s first look, basically, at what
all annuities have in common:
A) they are issued by life insurance companies
B) any applicable growth of funds, can grow tax-deferred
C) Annuities are considered to be long-term investment
vehicles. With the exception of an immediate annuity (IA’s),
virtually all annuities have a surrender charge period. This is a
period of time, where if you take out, usually more than 5-10%
of the value, in any given year, you will pay a “penalty for early
withdrawal”. The penalty for early withdrawal is called a
surrender charge. A surrender charge will apply during the
surrender charge period. The surrender charge period is usually
ten years. There are no surrender charges, at the owner’s
death. Let's say you own a ten-year surrender charge
annuity. Generally, surrender charges go down every year and
then after year ten, the surrender charge will be zero and there
will never be another / any other reoccurring surrender charge.
So, after the ten-year surrender charge period, you may keep
the annuity as long as you like, and you will have 100%
accessibility of your funds.
So, with the exception of an “immediate annuity “type of annuities, it is a misconception that the money you put into an annuity is tied up and not accessible (your money is accessible). Your money is accessible, but does have surrender charges, if you take out too much, in any given year (within the surrender charge period).
And D) All annuities can offer a type of "guaranteed lifetime income", for you and your spouse (although the life income / “Income for Life” features can vary greatly, depending on what annuity you own). Annuities are the only asset class, which can guarantee lifetime income/ Income that you cannot outlive/ Income for Life. This Lifetime income feature can be viewed as a pension and people like pensions (so if anyone, generically poopoo’s “annuities”, then ask the person to give back their pension or social security paycheck and see how defensive they get). Only life insurance companies can make such promises, only insurance companies can guarantee lifetime income/ Income you cannot outlive/ Income for life.
The FOUR Different Types of annuities.
The basic difference between each of the four types of annuities is in how they grow.
The four different types of annuities are:
1) Fixed Index annuities ( FIA’s)( also known as Hybrid
annuities)
2) Stated Rate Fixed Annuities ( SRA’s)
3) Variable Annuities and ( VA’s)
4) Immediate Annuities ( IA’s)
Fixed Index Annuities (FIA’s)
One type of annuities is the FIA ( Also know as a “Hybrid Annuity, because they are a Hybrid combination of all annuities, combining all the best, of all the annuities).
With a FIA, the owner’s growth has no risk to principle, can grow significantly and can lock-in gains, on the stock markets way up. FIA's can NOT lose money. How do FIA’s grow. With a FIA, the owner links their growth to a stock market index, of the owner's choice. Here the owner is linked to the gains of the index, not in the index, so therefore the owner only participates in the upside of the stock market, but never participates in the downside of the stock market. Plus, the owner "Locks in gains", on the way up, at certain time intervals (typically Locking-in applicable gains every year or every two years). Once annual gains are “locked-in”, then this becomes the owner’s new floor/principle and once gains are locked in, they can never be lost due to stock market volatility.
The FIA/ Hybrid Annuity can also have a “lifetime income” feature. This “Lifetime Income feature, is an optional feature. This “Lifetime Income Feature, if structured properly, can outshine the other annuities’ “Lifetime income feature”.
For example, the “Life Income Feature “on a FIA’s, if structured property, even if you are already receiving the monthly guaranteed Lifetime income, “the owner” still control the principle. By Controlling the principle means, even if you are already receiving the monthly guaranteed lifetime Income...
Controlling the principle means:
A) you can still enjoying receiving growth ( applicable growth on your principle , on an annualized basis),
B) you can still always have access to your principal (minus any surrender charges or prior withdrawals)
C) if you die, the unpaid out principle balance, still goes on to your heirs/ loved ones , in an inheritance (with an Fia’s, it is, the dollars you put in, plus the growth, minus any withdrawals= the legacy inheritance amount) and
D) with many carriers, if you need “long term care” the monthly Life Income amount can be enhanced.
In a brief summary, these are the seven key benefits and
reasons , for the popularity of Fia’s, the benefits being :
1) your principle is protected
2) strong potential growth, with growth being linked to a stock market index of your choice and locking Gaines in ,on your principle, on the stock markets way up
3) having an “ Income for life” feature
4) even when receiving the monthly Income for life, the owner can still be enjoying receiving growth , on your principle
5) while receiving the monthly income for life , you still have access to your principle,
6) while receiving the monthly income for life , you can have a long term care feature and
7) while receiving the monthly income for life, you can leave an inheritance.
To secure these seven 7 benefits of an FIA, ask your agent.
“Stated-rate” annuities (SRA’s)
Stated-rate annuities have a stated rate of interest. With a stated- rate annuity, the owner knows what the growth rate will be, because it will be stated right up front, when you purchase it. A note regarding stated- rate annuities, the “life income option”, with stated- rate annuities, they usually leave very little or nothing, for the heirs. So, if someone says annuities, do not pay much, they probably had a stated-rate annuity.
Variable Annuities (VA’s).
With a variable type of annuity, typically you are in stocks and bonds, therefore your fund value goes up and down, with the variableness and /or volatility of the stocks and bonds you are in. Variable annuities are just like a tax-deferred mutual fund, which goes up and down in value, with high fees of 2-5% annually each year, which can affect your growth. These fees come out of your variable annuity contract, every year, whether your account grows each year or not. So, if another “9-11” event happens, like the last “9-11” event happened, that immediately closed the stock market and wiped out 40% of its value over night, this could happen to a variable annuity, you could lose your principle. The variable annuity purchaser receives a prospectus, because, the prospectus says, you could lose money. A variable annuity can lose principle, due to stock market losses. Variable annuities, get their name, because their value is variable. Variable annuities can go down in value. So, if someone says my annuity has high fees or went down in value or they lost money, then they typically owned a
variable annuity.
Immediate Annuities (IA’s).
IA’s provide an income stream but typically have no growth. Since IA’s have no growth, that is why virtually nobody sells this type of annuity. A example of an “ immediate annuity “ , would be if a corporation, were to offer their retired employee a pension, the employer corporation might buy an “immediate annuity” ( the corporation gives the life insurance company a lump sum of money), for then the life insurance company, is then obligated to pay and guarantee the new retiree, that the retiree gets a monthly retirement paycheck, for as long as he lives ( now if the income recipient live to be age 100, then the recipient may receive much more than what was put in) , but the income recipient, with an immediate annuity, typically gets no growth in the income and of course no access to any principle and usually no death benefit . When the income recipient dies, typically it’s the end of story, no inheritance for the kids. Since “immediate annuities” typically have no growth of income and usually leave little or nothing to the heirs, immediate annuities can be unpopular to the income recipient. This is why, if an article may read, or someone may say, that annuities are not very popular or they leave no inheritance, they typically would be referring to the,” immediate annuity” type of annuity.
Life Assurance and Annuity Companies
You may be asking, how can these life insurance companies make this extravagant offer, that the owner is getting a good portion of the upturns, but is not participating in any of the downturns. How can the life insurance companies make money. Well, some life insurance companies / carriers may charge annual fees. Fees can also be charged for extra options. Annual fees can range from .1 (that is 1/10 of 1%) to 2%. As with any fee, ask yourself, is the benefit I am getting, worth the cost of the fee. What are you getting for the fee? Some carriers can also limit how much of the upside of the market you can get, such as they put an annual cap rate on your growth, or they may only give you a percentage of the annual growth. Some carriers may charge a spread. A spread only comes off your growth, so if there is no annual growth, then there is no spread. Some carriers have no fees, so ask your agent how these life insurance companies make money.
SAFETY
Now let's look at safety. Who's making these guarantees, that I “the owner” will not lose to stock market downturns. These are life insurance companies, which put it in writing. A misconception might be, how do I know my fixed annuity is safe. Fixed means, your value is “fixed in place” and cannot go down in value. First off, these life insurance companies, to offer Fai’s, have to be part of the Life insurance legal reserve system. The legal reserve system states, for every dollar of an insurance companies’ obligation, they must have the same dollar, set aside in reserve, to cover that obligation. Dollar for dollar backing.
Now if you're talking about comparing a fixed index annuity to FDIC insured bank products, fixed index annuities are not FDIC insured and are not backed by the federal government. They are backed by the same insurance companies that protect your house, car, life, health and virtually everything else of value. A review of the factual history of fixed index annuities shows that they're very safe. I have worked with insurance companies for many years and worked with people that have been in the industry for multiple decades and during that time I've never had a problem with any fixed annuity contract. In fact, even during the Great Depression, there was no history or record of any insurance companies failing to pay claims on their fixed annuity contracts. Pretty good track record wouldn't you say. Still, it would be a good idea to check with your state Department of Insurance (the government agency that regulates insurance companies), to confirm something called the state guarantee association fund. These states guarantee fund, was established to protect citizens holding annuities and other insurance policies. Of course, just like FDIC has dollar limits, these funds do have limits that vary by state. Rather than going into detail here, I would simply suggest you contact your state Department of Insurance, to clarify how this insurance program works in your state.
OTHER NEAT FEATURES
Also, another neat feature. If you fund your IRA with a FIA, with a properly named beneficiary, if structured properly, your funds can be exempt from probate. So, if you die, your funds can be saved and can bypass the probate process, otherwise saving your funds from being siphoned off by probate costs. By being exempt from probate, you can save your loved one all the potential costs, hassles, delays, and stress of probate.
Another neat feature of an FIA’s, some carriers publicize, that even when a FIA document gets hand delivered to you, (after it’s been funded), you still have a 10-to-30-day window, to review it, to make sure it’s all that you intended. Read your policy, everything will be in writing. During this review period, you can put in more money or less money or even get a full refund.
Conclusion
In a brief summary, these are the seven key benefits and reasons , for the popularity of FIA’s, the benefits being :
1) your principle is protected
2) strong potential growth, with growth being linked to a
stock market index of your choice and locking Gaines in ,on
your principle, on the stock markets way up
3) having an “ Income for life” feature
4) even when receiving the monthly Income for life, the
owner can still be enjoying receiving growth , on the principle
5) while receiving the monthly income for life , you still
have access to your principle,
6) while receiving the monthly income for life , you have a
long term care feature and
7) while receiving the monthly income for life, you can
leave an inheritance.
Ask your agent about securing all seven of these benefits.
So, as said in the beginning of this guide, you could ask four different people about their annuities and get four different answers, because each could own a different type of annuity, but now you know with clarity, what the benefits of annuities are, specifically of what an FIA can do for you.
Even if you looked into FIA’s years ago, they have continued to evolve, to be enhanced and are so much better than those of yesteryear (because many more carriers of FIA’s today do not have the fees, as compared to yesteryear).
Have your agent show you the “current rate” historical performance today (with the lower fees, as compared to yesteryear). Historic Fia growth performance is really quite impressive, compared to other safe money vehicles.
As compared to the old mantra of just going with stocks and bonds, many retirement-focused portfolios may want to start considering including FIA’s. The risk and reward factor of FIA is very impressive (no stock market risk, with decent gains, historic gains above the inflation rate). So, if you are looking for a retirement strategy that has growth, offers “Income for Life”, can outpace inflation and helps you experience a worry-free retirement, a properly structured FIA, may be your answer. If you want to get greater potential returns, with the least amount of risk, it’s time to look at, considering FIAs into your balance retirement portfolio.