What Are Indexed Annuities?
Kiplinger's Personal Finance discussed a few pros and cons about indexed annuities. In short, you need to study the fine prints and make sure you understand what you are about to buy. Like elsewhere in the spectrum of investments, there is no free lunch.
"An equity-indexed annuity is a type of deferred fixed annuity, which provides investors with a guaranteed minimum return while allowing them to save for retirement on a tax-deferred basis. What distinguishes the equity-indexed annuity from the traditional annuity is that its returns are partially linked to stock market indexes, usually the Standard & Poor's 500-stock index. But investors who believe that these annuities will match stock market returns in a bull market will be sorely disappointed. The index-linked return is based on a formula described in the insurance contract. The "participation rate" determines what percentage of the gain in the stock market index will be credited to your annuity. For example, if the participation rate is 80% and the index increases by 8%, the interest ..." Full StoryHow To Find The Best Fixed Annuity Coverage
To get the best fixed rate annuity coverage you definitely need to shop around to find a good deal. The easiest way to do this is to get on the Internet and start comparing insurance rates. There are hundreds of sites on the World Wide Web that specialize in offering charts and product sheets so that you can compare different offers side by side. These types of insurance comparison web sites that make it quick and easy for anyone to compare different offers and interest rates, even if you have never taken out insurance or a pension before. The reason that most people end up paying too much for their fixed annuity plans is that they don't bother to shop around for the best annuity ... Full Story
How To Buy Annuities?
You might want to read the fine prints and have complete understanding of the annuity product you are looking at before you pull the trigger.
"Annuities come in many styles, but they share a common trait: The mere mention of them brings worried frowns to financial planners. That's because many of these investment-cum-insurance products come with steep fees and confusing restrictions, detailed in contracts that are inches thick and difficult to understand. Combine the complexity, fees and restrictions -- some products charge as much as 8% if you pull money out in the first year or two -- with commissions as high as 10% for the agents selling annuities and, some planners say, investors often end up with products that are unsuitable for them. Still, annuities can hold a rightful place in some investment portfolios -- but choose carefully. Not all annuities are created equal. Fixed annuities offer a set ..." Full StoryHow To Buy Annuities
Yes, it is important to understand annuity is not a standardized product, and it pays to spend time to compare and shop.
"Not all annuities are created equal. Fixed annuities offer a set rate of return. Variable annuities' return is based on the performance of investments in the annuity's portfolio. Equity-indexed annuities typically offer a blend of both: A minimum fixed rate of return plus a variable rate based on the return of a particular stock index. This gives you a guaranteed return, combined with a chance to capture the index's market gains. But know that your return may be capped at less than the index's performance. Read more on the SEC Web site. You can buy fixed or variable annuities that are deferred -- that is, you're putting money aside for a future date -- or you can buy fixed or variable annuities that are "immediate ..." Full StoryMix Annuity With Portfolio Investment
Money magazine argues that by properly allocating funds to annuity and stock/bond portfolio, one can substantially reduce the probability of running out of funds in retirement.
"The concept is simple. Put part of your retirement savings in an income annuity and then invest the rest in a diversified portfolio of stock and bond funds (or individual stocks and bonds, for that matter). The annuity payments give you a steady month-to-month income that won't run out. The investment portfolio provides whatever additional income you need and a kitty for unanticipated expenses, plus the long-term growth that can help you keep up with inflation. This combination has another advantage: It can improve the odds that you'll be able to live off your money for 30 or more years. To get a sense of how much the annuity can help, take a look at the graph above. It compares how a 65-year-old man who ..." Full StoryBuilding Wealth With Annuities - Variable Annuity
Variable annuities may be a good alternative for your wealth building, but shop carefully since there are so many tricks.
"When it comes to building assets for retirement, you have a choice of two types of annuities: fixed and variable. Since each type raises different issues and requires different analysis, we'll examine them separately. VARIABLE ANNUITIES: Unlike their fixed counterparts, variable annuities are designed to pump up your savings by giving you a chance for long-term capital growth. They do this by allowing you to invest in anything from half a dozen to 20 or so stock or bond mutual-fund-like portfolios called subaccounts, many of which are run by such established fund managers as Strong Opportunity Fund's Dick Weiss and Templeton emerging markets guru Mark Mobius. As with fixed annuities, gains escape taxation until withdrawal. ... BOTTOM LINE: If you've already maxed out your contribution ..." Full StoryBuilding Wealth With Annuities - Fixed Annuity
Solely relying on fixed annuity is probably not a good idea for a robust retirement plan.
"When it comes to building assets for retirement, you have a choice of two types of annuities: fixed and variable. Since each type raises different issues and requires different analysis, we'll examine them separately. FIXED ANNUITIES: Fixed annuities are essentially CD-like investments issued by insurance companies. Like CDs, they pay guaranteed rates of interest, in many cases higher than bank CDs. In September, for example, annuities yielded 4% to 6% on average vs. 3% to 5% for CDs, and some insurers offered bonuses that pushed yields into double digits. Throw in their low investment minimums--usually $1,000 to $10,000--and the fact that the interest they pay escapes taxation until you pull it out, and it's no wonder people tired of seeing their savings pummeled in the ..." Full StoryAnnuity Is Not Cure-All
Good job Walter! In this vivid example, Walter Updegrave explained why annuity is not a good choice for the retired man in this situation. In short, annuity is not a one-size-fits-all solution for all people in retirement.
"Getting back to your situation, if you're thinking about a deferred annuity as a way to insulate yourself from the market's ups and downs, then I don't think an annuity is a very good idea. For one thing, you don't need the tax deferral that annuities offer. You already get that within an IRA, and putting an annuity within your IRA would offer no additional tax benefit. More importantly, though, deferred annuities just have too many fees, expenses, complications and pitfalls. For example, most have surrender charges that can penalize you heavily for early withdrawals, although "early" may mean within 10 or more years. So if what you really want is some shelter from a market setback, I'd suggest re-evaluating your mix of stocks and ..." Full StoryAnnuity's Many Benefits #6: Benefits to Heirs
Why should you consider annuity as an integral part of your investment plan? Here is our point-by-point breakdown of annuity's many benefits:
"Benefits to Heirs There is a common misconception about annuities that goes like this: if you start an immediate lifetime annuity and die soon after that, the insurance company keeps all of your investment in the annuity. That can happen, but it doesn’t have to. To prevent it, buy a “guaranteed period” with the immediate annuity. A guaranteed period commits the insurer to continue payments after you die to one or more beneficiaries you designate; the payments continue to the end of the stated guaranteed period—usually between 10 to 20 years (measured from when you started receiving the annuity payments). Moreover, annuity benefits that pass to beneficiaries don’t go through probate and aren’t governed by your will." Full StoryAnnuity's Many Benefits #5: Lifetime Income Stream
Why should you consider annuity as an integral part of your investment plan? Here is our point-by-point breakdown of annuity's many benefits:
"Lifetime Income Stream A lifetime immediate annuity converts an investment into a stream of payments that last as long as you do. In concept, the payments come from three “pockets”: Your investment, investment earnings and money from a pool of people in your group who do not live as long as actuarial tables forecast. It’s the pooling that’s unique to annuities, and it’s what enables annuity companies to be able to guarantee you a lifetime income. " Full StoryAnnuity's Many Benefits #4: Rich Selection of Investment Options
Why should you consider annuity as an integral part of your investment plan? Here is our point-by-point breakdown of annuity's many benefits:
"Rich Selection of Investment Options Many annuity companies offer a variety of investment options. You can invest in a fixed annuity which would credit a specified interest rate, similar to a bank Certificate of Deposit (CD). If you buy a variable annuity, your money can be invested in stock or bond (or other) mutual funds. In recent years, annuity companies have created various types of “floors” that limit the extent of investment decline from an increasing reference point. For example, the annuity may offer a feature that guarantees your investment will never fall below its value on its most recent policy anniversary." Full StoryAnnuity's Many Benefits #3: Tax Free Change to Investment Choices
Why should you consider annuity as an integral part of your investment plan? Here is our point-by-point breakdown of annuity's many benefits:
"Tax-free Transfers Among Different Investment Options In contrast to mutual funds and other investments made with “after-tax money,” with annuities there are no tax consequences if you change how your funds are invested. This can be particularly valuable if you are using a strategy called “rebalancing,” which is recommended by many financial advisors. Under rebalancing, you shift your investments periodically to return them to the proportions that you determine represent the risk/return combination most appropriate for your situation." Full StoryAnnuity's Many Benefits #2: Protection from Creditors
Why should you consider annuity as an integral part of your investment plan? Here is our point-by-point breakdown of annuity's many benefits:
"Protection from Creditors If you own an immediate annuity (that is, you are receiving money from an insurance company), in general the most that creditors can access is the payments as they’re made, since the money you gave the insurance company now belongs to the company. Some state statutes and court decisions also protect some or all of the payments from those annuities. And your money in tax-favored retirement plans, such as IRAs and 401(k)s, are generally protected, whether they are invested in an annuity or not." Full StoryAnnuity's Many Benefits #1: Tax Deferral
Why should you consider annuity as an integral part of your investment plan? Here is our point-by-point breakdown of annuity's many benefits:
"Tax deferral on investment earnings Many investments are taxed year by year, but in annuities, the investment earnings -- capital gains and investment income -- aren’t taxable until you withdraw money. This tax deferral is also true of 401(k)s and IRAs; however, unlike these products, there are no limits on the amount you can put into an annuity. Moreover, the minimum withdrawal requirements for annuities are much more liberal than they are for 401(k)s and IRAs." Full StoryWhat Is An Annuity?
In its most general sense, an annuity is an agreement for one person or organization to pay another a stream or series of payments. Usually the term “annuity” relates to a contract between you and a life insurance company, but a charity or a trust can take the place of the insurance company.
"There are many categories of annuities. They can be classified by: Nature of the underlying investment – fixed or variable Primary purpose – accumulation or pay-out (deferred or immediate) Nature of pay-out commitment – fixed period, fixed amount, or lifetime Tax status – qualified or nonqualified Premium payment arrangement – single premium or flexible premium An annuity can be classified in several of these categories at once. For example, you might buy a nonqualified single premium deferred variable annuity. " Full StorySponsors
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