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Archive for the ‘Annuities’ Category

In this article I will attempt to answer common questions on annuities.
What is an annuity? An annuity, in laymen terms, is basically where you pay a company (usually an insurance company), a lump sum of money, and then you will be given fractional amounts of that money every year, with interest. Think of annuities as a loan, except you are bank.

What makes annuities preferable to other investments? Well first of all, there is virtually no work involved, after you pick the right annuity for your particular situation, you can kick back and watch the money come in monthly. Also, there are so many different types of annuities these days that are tailored around a persons specific need.

What makes annuities bad investments? The lack of work can sometimes go both ways in a situation like this. Sure you don’t have much to do when it comes to retirement planning if you choose to allocate a large portion of your portfolio to annuities, but you also do not have the same flexibility when it comes to changing your investments over time to go with market trends or changes in your personal situation.

What are different types of annuities? There are three main types of annuities, a normal life annuity, an annuity that rises your payments along with inflation, and a fixed annuity. A fixed annuity is about as straightforward as it gets, you get the same payment amount each month, even if the stock market is crashing or inflation is soaring. With a normal life annuity you get an equivalent return on your money that the stock market is averaging. With an inflation indexed annuities your payments will rise with inflation.

Rising interest rates are another reason to avoid Equity-Indexed Annuities. If you are retired or near retirement, don’t let yourself be talked into purchasing an Equity-Indexed Annuity. If you do, it could easily be a decision you regret for many years to come.

I’ve been called ‘a lone voice in the wilderness speaking out’ about the dangers of equity-indexed annuities. It seems that everywhere you turn there is an advisor or insurance agent telling you an equity-indexed annuity is the greatest thing since sliced bread. Don’t believe them.

I’ve talked at length in other articles about the hidden dangers in Equity-Indexed Annuities. You can find those articles at http://www.guardingyourwealth.com, but the 3 main reasons are (1) they needlessly require you to lock up your money for a very long time, (2) the majority of your returns are still based on the stock market and (3) the commissions for selling an Equity-Indexed Annuity are so high it creates a tremendous conflict of interest for those recommending them. Rising interest rates are just one more reason. Let me explain.

Equity-Indexed Annuities eliminate your flexibility and control over YOUR money. In today’s post-9/11 world where terrorism is a very real threat, it’s important that you have the ability to make changes to and access all of your money when you need to–without incurring surrender penalties that can be as high as 20%! Locking your money into an Equity-Indexed Annuity for 10-15 years causes you to lose control of all but a small portion of it. Equity-Indexed Annuities don’t offer enough reward in exchange for such a long-term commitment.

The main selling point of an Equity-Indexed Annuity is the ability to participate in the return of the stock market but have a ‘guarantee’ that your money will earn at least 3%. The performance of these investments is designed to come from the stock market, not the guarantee. If you are willing to invest in the stock market, I feel there are better ways to do so which provide downside protection while allowing you to retain complete control and flexibility. (Contact me for more information.)

Rising interest rates is another reason you shouldn’t invest in an Equity-Indexed Annuity. Over the past 3 years, the thought of earning a 3% fixed return on your money didn’t sound too bad. Certificates of Deposit at the local bank have only been paying 1% or 2%. That’s made it difficult for those relying on that income to meet their monthly needs. Equity-Indexed Annuity salespeople have used this as a main selling point.

But things have changed. The Federal Reserve recently increased the Federal Funds interest rate by one quarter of one percent. That may not sound like much, but it’s the first time they’ve raised rates in four years. They also signaled that the economy is heading in the right direction and that they’ll continue to raise interest rates over the next few years as necessary to keep inflation in check.

The interest rates available on Federally Insured Certificates of Deposit (CDs) have already risen significantly. You can earn almost 2.5% on a 1-year CD and over 3% on a 2-year CD. The futures markets project that Federal Funds interest rates could be as high as 3% by the end of 2005. That’s means it is likely that you’ll be able to get a 1-year CD for over 4% and a 2 or 3-year CD for 5%.

Think about it–if you can earn 5% on a short-term, Federally-insured Certificate of Deposit, why would you want to lock your money up for 10 to 15 years with a guarantee of only earning 3%? Especially if you’d have to pay a penalty that could be as high as 20% to get at more than just a small portion of it! It just doesn’t make sense.

For those needing income, now is the time to be patient. Use short-term investments like Certificates of Deposit that mature in 1-year or less. When they come due, chances are rates will be significantly higher and your patience will be rewarded.

If you’d like me to answer specific questions about your financial situation, feel free to email me at jeff@guardingyourwealth.com or call 1-877-827-1463. I regularly respond to readers’ questions and would be happy to answer yours.

Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN.

One of the things that people are much concerned with in today’s times is security. This is not about physical security at your home but rather, it is being secured financially after retirement.

With so many offerings in the market with regard to securing your finances in the future, it is oftentimes a quandary where to invest your hard-earned savings. A lot of insurance companies offer different kinds of long-term insurance policies that embody the most ideal way to be secured upon reaching the age of retirement. But have you heard about annuities, and why a lot of people invest in them?

Annuities are comparable to insurance policies. They are in fact similar in a lot of ways. For instance, in both cases, you would be paying monthly premiums as agreed upon between you and the insurance company. And whatever benefits you would be getting upon maturity of your policy, would also be dependent on the amount that you have paid on your monthly premiums. Specifically, annuities give you more flexibility in choosing how much you would like to receive when you retire. More explicitly, getting a whole life policy is tantamount to buying into annuities. There are several reasons why this type of insurance is more advantageous to invest in, compared to other forms of policies.

A Safe Investment

When you invest in annuities, you are assured that the principal amount you put in is protected. At some time in the future, if you would like to withdraw, you may do so even prior to its maturity. You just need to pay a certain amount as penalty. When you own an annuity, the control of withdrawals belongs to you.

What is really good about annuities is that just like a bank deposit that is guaranteed by government, an annuity is also guaranteed by the state insurance guaranty fund. So when you invest in annuities, you are granted peaceful nights knowing that the amount you invested is safe.

Financial Growth

Annuities carry with them interest rates that are highly attractive. In fact, you may find different insurance companies offering very competitive rates of interest in order to attract more people to invest in annuities. This is very advantageous on the part of the buyer since you do have the option to choose what entity to trust with your money. The one that offers the higher rate on annuities along with the most incentives would surely be chosen and you get to receive the benefits.

Estate Benefits

At some point in time, people would always think of their heirs. Oftentimes, any changes to the will require a tedious procedure. This is different when it comes to annuities. You can easily name a beneficiary without having to go through the probate process. So you could bequeath it to an heir in a quick and speedy manner, without going through wearisome formalities in a probate court. Aside from that, there is no direct relationship between your will and your annuity. If you wish to make one child your beneficiary since he has been good to you, it would be very simple. The particular child would benefit solely since he was the only one declared as your annuity beneficiary.

Lifetime Monthly Income

When you invest in annuities, you are guaranteed to receive a monthly income for the rest of your life. Other policies would be giving you a bulk amount, which may actually be depleted within a number of years. With annuities, on the other hand, you get to have a stable monthly income after retirement that would sustain you for a lifetime.

Indeed, buying annuities could mean security for the rest of your life. Nothing could be better than knowing that your investment is safe, that it would grow, that you could pass it on to your heirs, and that you will be receiving a monthly income after retirement.

I’m kind of tired of all the opinions about variable annuities. From all I’ve seen, the “expert advice” goes either strongly for or against the product. If the believers were correct, every sales office would have a line down the street but if the non-believers were correct, every insurance company would be shut down because of fraud.

I know that sounds extreme but it really does show you the difference in the type of advice you are bound to get. So if you are familiar with my work, you’ll know that I try to be objective and provide solid evidence as to the pros and cons of various products.

It’s been a long time coming but I’ll tackle the variable annuity debate in this article. Before I go further let me state that I’m not overwhelmingly for or against variable annuities and there are times when they work great and others when they are completely inappropriate.

Pros

Guarantees:

Death Benefit- This allows the heirs of the contract to inherit the full principal balance in the event that the contract owner passes away while the contract is in force and the account has lost value

Income- This allows the contract owner to lock in a predetermined level of future income regardless of account performance.

Principal- This allows the contract owner to recover the principal investment or the highest contract value achieved regardless of the account value at time of surrender.

Tax Deferral: Taxes are deferred on the growth of assets inside an annuity giving the contract owner the added benefit of greater compounding. Many critics suggest that excessive fees mitigate tax deferral benefits. If tax deferral is the sole focus of purchasing an annuity, expensive optional riders can be waived so that total fees will run no higher than the average mutual fund.

Unlimited Contributions: Retirement plans have contribution limits. If you ever come in to a larger sum of money, much of it will not be eligible for allocation in a 401K, IRA, etc. Annuities have no contribution limits.

Cons

High Fees: Many annuities have optional riders that push the overall fees to 3% or more. Plenty of products allow an investor to elect out of the options but some don’t. If you are purchasing an annuity with high fees, there had better be compelling reasons to do so.

Limited Investment Choices: Asset allocation options are limited within an annuity. Some contracts have predetermined portfolio balances and others will list a limited number of available mutual funds.

Surrender Charges: As with all annuities, variable products have surrender charges so your money is tied up for a specified period of time except for the usual 10% annual free withdrawal. Be positive that the surrender schedule works with your investment time horizon.

Immobility: The combination of investment limitations and surrender charges means that your money is much less mobile than it would be in an equivalent securities account.

As you can see, the analysis is pretty simple. If you are looking at the prospect of a variable annuity just weigh the pros vs. cons to figure out if it works for you. Unfortunately, most of the cons seem to kind of be deal breakers if even one is intolerable. That supports my thought that variable annuities have specific uses for a small class of investors. It either works for you or it doesn’t. Make sure to seek solid advice from an open-minded advisor.

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Financial markets have a tendency to capriciously fluctuate with little predictability. Meanwhile, due to the fact that annuity income is considered guaranteed, safe, and reliable, it can provide greater financial stability for one’s retirement years.

For those unfamiliar with annuities, these are contracts between an insurance provider and yourself. You agree to fund the annuity. It can be funded with a lump sum of money that you might have or through a regular payment to the insurance company. Either way, the insurance company agrees to pay you a predetermined amount over an agreed upon time frame.

Most people find that being able to structure an income source that won’t be outlived is one of the most appealing features of an annuity. Having more than just one payout option is another attractive feature. For example, you may opt to have the income guaranteed for your lifetime and the lifetime of your beneficiary or have the income guaranteed for just your own lifetime. However, do keep in mind that opting to continue the payout over the lifetime of a beneficiary after your death will result in a lower payment than if you opt to receive payments only throughout your own lifetime.

There is also the financial benefit of tax-deferred growth; the ability to contribute unlimited amounts of post-tax dollars; and the ability to continue your contributions indefinitely, even after retirement. You won’t pay taxes on your annuity until you make a withdrawal. Once a withdrawal is made, a regular income tax will be due. However, if you decide to make an early withdrawal, that is take an annuity distribution before you’ve reached age 59 1/2, then you’ll suffer the same 10% tax penalty you would from any other qualified retirement account.

An annuity also offers several benefits in the area of estate planning. If you decide to name a family member as your beneficiary, then they will usually directly receive the benefits and not have to wait while your estate goes through probate. In addition, if you name your spouse as your beneficiary, then he/she can maintain the annuity and the tax-deferred state if they so choose.

Even though an annuity is one of the few investments that can tout it offers a substantial amount of control over how much retirement income is generated and the benefit of tax-deferred growth, an annuity won’t be the perfect option for everyone in every situation. Consulting with a professional financial advisor experienced in annuities can help you determine if an annuity is the best option for your needs.

- Anita Yulianti Investment -

I’ve disliked variable annuities for many years because of their high fees and onerous surrender penalties. Now, low-cost variable annuities are available that slash fees and do away with the surrender penalties. Does this change my opinion on the use of variable annuities? Read on to find out.

There is $1.8 trillion dollars invested in annuities and a lot of that money is in variable annuities. To put this in perspective, there are $2.1 trillion in 401(k) assets. That’s right. There’s almost as much money in annuities as there is in 401(k) retirement programs!

As I’ve mentioned in previous articles on variable annuities (available at http://www.guardingyourwealth.com), variable annuities are sold because of two main features–tax deferral and a death benefit guarantee.

Tax-deferral is emphasized if you are investing non-retirement money. Instead of having to pay taxes on dividends, interest and gains each year, those taxes are deferred until you withdraw the money from the annuity.

This used to be an attractive option, but not since capital gains and dividend tax rates have been lowered to a maximum of 15%. You see, earnings withdrawn from an annuity are taxed at higher ordinary income rates. These can be as high as 33%.

In years past there wasn’t much difference between ordinary income tax rates and those on dividends and capital gains. Now, there is a substantial penalty when earnings are taxed as ordinary income. As a result, it can take decades before you really see the benefit of tax-deferral.

The other main selling point of variable annuities is the death benefit guarantee. Investors like the peace of mind knowing that even if the market drops substantially, their heirs will get at least what they initially invested when they pass away. This is used to entice investors to choose an annuity for their IRA where the annuity’s tax-deferral feature is worthless.

Unfortunately, investors had to pay through the nose for those benefits–typically 1.4% of the value of your account each year. On a $200,000 account, you would be paying $2800 a year. Over ten years it is likely those benefits would cost over $30,000. That’s some of the most expensive insurance you will ever buy.

Now there are new, low-cost variable annuities available from companies like Fidelity and Vanguard that lower the costs of these benefits. For instance, Fidelity offers one that charges

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