We know that it is essential for you to leave your loved ones in a secure and comfortable financial condition. The cost of leaving your family financially unprepared in case of death is too great a price to pay. Diverse Financial Corporation offers financial protection through low cost senior citizen life insurance making sure the burden of your loss is the only price your family will have to pay.
You’re not alone. Many people have difficulty understanding them. The main reason for all the confusion: Annuities may be single or flexible-payment; fixed or variable; deferred or immediate. No matter the type, annuities are financial contracts with an insurance company that are designed to be a source of retirement income. Click on the links below to learn more about annuities.
You can purchase an annuity in two ways: Make one lump-sum payment to purchase a single-premium annuity. If you want to contribute more money at a later date, you will have to purchase another annuity. Make ongoing contributions to a flexible-payment annuity. You can contribute money at regular or even irregular intervals anytime you want.
There are two basic types of annuities you can buy, fixed and variable.
Fixed annuities earn a guaranteed rate of interest for a specific time period, such as one, three or five years. Once the guarantee period is over, a new interest rate is set for the next period. This guarantee of both interest and principal makes fixed annuities somewhat similar to Certificates of Deposit (CDs) purchased from a bank. Unlike a typical CD, however, an annuity is not backed by the Federal Deposit Insurance Corporation (FDIC); its security is directly related to the financial health of the insurance company that issues the annuity.
Variable annuities typically offer a range of investment or funding options. These funding options may include stocks, bonds and money market instruments. The return on variable annuities can go up or down. Your principal and the return you earn are not guaranteed; they depend on the performance of the underlying investment options. If the funding options you choose for your annuity perform well, they may exceed the inflation rate or fixed annuity returns. If they don’t, you may lose not only prior earnings, but also some of your principal.
Variable annuities also allow you to transfer money from one account to another without triggering a taxable event. In other words, if you transfer money to a different funding option within your variable annuity, you will not have to pay taxes on any earnings you have made. Tax-free switching lets you re-allocate money to suit changing market conditions, without worrying about the taxes.
Variable annuities usually have more features and higher fees than fixed annuities. With some fixed annuities, contract expenses such as maintenance and contract fees are taken into consideration when the company declares periodic interest rates or determines the payment amount.
Variable annuity fees are more complicated. They may include an annual contract charge that covers administrative expenses and surrender fees, as well as a mortality and expense risk charge. Variable annuities charge this latter fee to guarantee the death benefit, the availability of payout options and the level of expenses.
In addition, a variable annuity has fees for the management and operating expenses of the funding options in which your money is invested. These charges pay for everything from the fund manager’s salary to the costs of printing the fund prospectus.
For a variable annuity, all fees and other important information will be explained in the prospectus that describes the variable annuity contract. The prospectus must be given to you when you are solicited to purchase a contract. Read it carefully before you invest or send money and be sure you understand exactly what your expenses will be.
Deferred annuities can be a great way to accumulate money for retirement, if you want retirement income beyond what you will receive from Social Security or your pension plan. They are particularly effective if you have many years before retirement. Your money grows tax deferred, which means you pay no taxes on earnings until you begin to withdraw your money.
If the tax-deferred aspect of a deferred annuity is important to you, make sure the expenses do not outweigh the tax benefits. This can be a tough judgment call, but a good guideline is that if the expense charges are more than 1.5% greater than a comparable financial vehicle and your time horizon is less than 10 years, a deferred annuity may not be the option for you. Consult a tax advisor for assistance in making this determination. A deferred annuity is not a vehicle for money you may need for current expenses. If you withdraw income before age 59�, the IRS will usually apply a 10% penalty in addition to ordinary income tax, similar to the penalty for early IRA withdrawals. What’s more, your insurer may impose its own early withdrawal penalty, known as surrender fees, if you cash in your deferred annuity (surrender it) within a specified period. These fees, similar to withdrawal penalties on a CD, usually cease seven years after your date of purchase. Often there is a separate surrender fee for each payment. So, a new payment may have a 7% fee if you take the new payment out right away, while a 10-year-old payment may have no surrender fee. The fee will usually decrease and be eliminated over time. Keep in mind, however, you can often withdraw small amounts (e.g., 10%) annually without any penalty from your insurer, but the IRS penalty may still apply. The IRS views all withdrawals as income, which are taxable, until all income has been paid out. If you switch annuities, you may also incur withdrawal charges from your current annuity. If a salesperson advises you to change annuities despite the fact that you will be penalized, make sure you know the reason. Do the benefits of the new annuity, such as a higher interest rate, better investment choices or greater flexibility offset the withdrawal charges? Be sure the salesperson isn’t benefiting from the switch at your expense. If you decide to exchange one annuity for another, be sure to request and complete the appropriate forms provided by your insurance company to ensure that the transaction will be treated as a tax-free exchange under the federal income tax law (Section 1035 of the Internal Revenue Code).
When you’re ready to start withdrawing money from your deferred annuity, you will need to choose how to receive your money. You can take it all out in a lump sum, take it as needed, or receive it in a steady stream of periodic payments, so-called “annuitizing.” If you annuitize, you can receive a stream of income that is guaranteed to continue for the rest of your life, no matter how long you live. And, the tax liability can be spread out for the rest of your life too. Some of the earnings are included in each payment and are taxable, meanwhile, any earnings continue to accumulate tax-deferred on the remaining principal and earnings that have not yet been distributed. So, receiving distributions as periodic payments after retirement may further reduce your income tax liability, if you are in a lower tax bracket. Some annuities also provide you with an option to have a set amount, determined by you, automatically withdrawn and deposited directly in your checking account during a regularly scheduled period, such as monthly. You have many options on how you receive your money, each with its own tax ramifications. Consult your tax or financial advisor to tailor a plan for your particular needs.
There are a number of good reasons to consider a deferred annuity as part of your financial retirement plan:
You postpone paying income taxes on any earnings until you withdraw money, typically during retirement, when you may be in a lower tax bracket. All earnings grow tax-deferred. You can put in as much money as you want. Unlike Individual Retirement Accounts (IRAs), there is no IRS restriction on the amount that can be contributed annually to deferred annuities with your after-tax money. You can, however, use a deferred annuity to fund your traditional or Roth IRA, in which case you would operate within IRA limitations. You can provide death benefits to your heirs. If you die prematurely, your annuity can offer a death benefit to your beneficiaries without the costs and delays of probate. Your beneficiaries will never receive less than what you have contributed (less any withdrawals). In addition, a spouse who inherits an annuity before distribution has begun can step in as the new owner of the annuity and the tax deferral continues until amounts are withdrawn. If distribution payments had begun, the benefits would generally have to be distributed to the beneficiary at least as rapidly as through the method in effect at the time of the annuitant’s death. Taxation will continue to apply to those proceeds. Generally, a beneficiary who inherits an annuity before distribution begins can request a lump sum distribution without penalty but will be subject to full taxation on the accrued interest or gain on the contract.
To purchase an immediate annuity, you make a one-time payment, and distributions typically begin within a month. Immediate annuities can be fixed or variable, just like deferred annuities. The income payments you receive from fixed immediate annuities are based on the amount you contribute, your age and the interest rate environment at the time of purchase. The payments to you will not change. The payments from variable immediate annuities fluctuate based on the performance of the investment options you choose. Although payments may go up or down, variable annuities are designed to provide income that can rise over time to help you keep pace with inflation.
The principal in an immediate annuity is not readily accessible. If you need more money than the income provided by the immediate annuity, you can minimize this drawback by keeping some of your retirement funds in a liquid account, such as a savings account or money market fund. There also is a chance you may lose some of your principal. If you choose an income for life option with no refund guarantee, and you should die before your principal is all paid out, the balance of your principal and any earnings will go to the insurance company rather than to your heirs. Fortunately, annuities offer several guaranteed payout options.
When selecting the investment options for your immediate annuity, keep inflation in mind. You want investments that will keep pace with inflation. Variable annuities can let you participate in stock market growth, historically shown to be one of the best ways to combat inflation over the long term. However, the downside is that payments can drop if the market drops. Not only is this unnerving, but obviously it will make it harder for you to budget. If you still want the potential for higher payments, consider dividing your retirement savings between fixed and variable options to provide fixed payments, as well as growth potential. Immediate annuities can provide dependable financial security: a stream of income payments guaranteed to continue for the rest of your life or for a period you select. If you are about to retire, an immediate annuity may be a good place to put a large lump sum of money accumulated for retirement through another savings or investment vehicle. You also can convert your deferred annuity into an immediate annuity to start receiving income.
Among the reasons to consider an immediate annuity are the following: An immediate annuity is a financial vehicle that can provide guaranteed income for life. The income payments you receive can supplement your other income sources, such as Social Security and pension payments, which may not provide enough income by themselves. You choose how often to receive your income payments. Whether monthly, quarterly, semiannually or annually, there’s a payout plan to fit your particular needs.
You pay income taxes only as you receive your payments. When you receive income payments, you will be taxed on the portion of the payments that is earnings. The portion that is principal, which represents your initial deposit made with money that had already been taxed, is not taxable.
You may lessen your financial worries. Financial management can be a burden in your retirement years. Because you don’t know how long you’ll live, it’s hard to be sure your resources will last as long as you need them. If you withdraw too much of your nest egg, your future income can suffer or you may run out of money entirely. If you are too thrifty when it comes to spending your nest egg, your level of living may suffer. Immediate annuities can remove some of these burdens by providing you with a predictable fixed payment for life, so you can concentrate on enjoying your hard-earned retirement.
You can choose from a number of options for receiving income from an annuity. Lifetime Income for You. You can opt for income, guaranteed by the insurance company, for the rest of your life. Payments cease upon your death.
Lifetime Income with a Guaranteed Period. You will receive income for life. If you die before the guarantee period is over, your beneficiaries will receive the remaining number of guaranteed payments.
Lifetime Income for Two. You can opt for income guaranteed for the rest of your life and the life of another person, such as your spouse. Guaranteed income for two people is known as a joint and survivor option, which guarantees that income payments will continue for the life of the primary owner and a second person. The insurance company that issues your annuity makes the guarantee.
There are many other options which can be explained to you by a financial advisor or insurance representative. These options can usually be mixed and matched to provide an ideal income plan for your needs. For example, say you and your spouse retire at age 65 with 10 years left on your mortgage. You could choose the option to have income for two people with a 10 year guaranteed period, so that if you both die before the guarantee expires, the payments would continue until the end of the 10 year period to pay the mortgage for your beneficiaries. These guarantees are subject to the claims paying ability of the issuer.
Imagine that you and your spouse are finally enjoying the freedom and fun of retirement. Your kids have flown the nest, the pressures of a career are behind you, and you’re in good health and able to travel, socialize and pursue interests such as volunteer work. There’s just one nagging worry. You’re not sure just how many years of retirement you’re facing, and planning a life income that could last to a ripe old age is a challenge. Living a long and healthy life is wonderful, but an extremely common concern for retirees is that they may outlive their savings. Americans are living longer than ever. At the same time, issues with corporate pensions, the Social Security system and a volatile stock market do little to allay fears of running out of money. One answer could lie with a little-known insurance product called an immediate income annuity, also known as a life annuity. One of the great features of life annuities is their ability to provide you with income for the rest of your days - in effect, a lifetime stream of income that you can never outlive. Even if you live to a ripe old age of 120, you are still guaranteed payment from the insurance company if you chose to receive annuity payments for life. (Other payout options are available as well, known as “period certain annuities.”)
An immediate annuity can solve many of your income needs. The unique guarantee, security and flexibility offered by an immediate annuity make the product an ideal financial solution for many situations. For example, if you’re searching for an easy way to manage your retirement income, an immediate annuity can relieve your financial concerns with a simple one-time premium. Or, if you have a qualified plan and want to retire early, an immediate annuity can help you avoid early withdrawal penalties.
An immediate annuity provides protection against outliving your assets. Advances in technology and healthier lifestyles are allowing Americans to live longer than ever. According to the NationalCenter for Health Statistics (1996), if you plan to retire at age 65, you can anticipate managing your assets for income 20-30 more years. But you can relax -- immediate annuity payments are guaranteed for life (or the certain period of time you choose). You can never outlive lifetime benefit payments and they will never fluctuate. With the guaranteed income offered by an immediate annuity, you’ll only have to worry about managing your retirement spending.
You may select from several immediate annuity payout options that can be customized to meet your needs.
The Single Premium Immediate Annuity is immune to market fluctuations which can put your retirement plans in jeopardy.
You choose to receive payments as frequently as needed to best meet your situation.
Choosing a life option assures you income that you can’t outlive.
You can choose from several different income payment options for your immediate annuity.
You decide how many years you want to receive income payments and the amount of each income payment is reported to you.
You decide how much you want your income payment to be and the calculation of how long the payments last will be done for you.
With a life payout option, you will receive payments for the remainder of your life. The risk with this option is that if you die before receiving the full-accumulated value of your investment, you could lose some of the value of your investment.
With this option, equal payments are made to you throughout your lifetime or to your beneficiary for a guaranteed minimum period of time.
Under this option you elect to receive a life income; but if you don’t live long enough to receive all your premiums back, it will be refunded to your named beneficiary.
This payout option provides for payments over the lives of two individuals and can also be combined with period certain options.
There are two phases in the life of a typical annuity: the Accumulation Phase and the Payout (or Annuitization) Phase. If you purchase a deferred annuity (regardless of whether it’s a fixed annuity that is invested with a guaranteed interest rate or a variable annuity which is invested in stock mutual fund accounts) your annuity will accumulate earnings on a taxdeferred basis. The Payout Phase begins when you decide to begin receiving income from your accumulated account.
Generally you have two ways to receive cash from an annuity on a regular schedule. One is to set up a Systematic Withdrawal schedule by which you control the amount to take out and you can start or stop the cash flow at your discretion. The second method is called the Annuitization approach.
The annuitization payout process works the same for a fixed or variable annuity. When you’re ready to start receiving payments, you notify your insurance company that you wish to convert your account into an immediate income annuity. The company actuaries go to work and they consult tables which tell them what your life expectancy is at the time you initiate your payout phase. Insurers must ascertain how long you can reasonably expect to live in order to figure how much guaranteed income your accumulated account balance can generate.
