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Annuities 101

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Originally posted on https://www.annuityexpertadvice.com/annuity-101/

 

What is an Annuity?

An annuity is a financial product or contract between the consumer and the life insurance company used for retirement planning.

Thinking about buying an annuity? Read our guide first.

Annuities come in many forms and serve many purposes.

We’ll go over the many types of annuities, terminology, and how they are used while living in retirement.

Disclaimer* Videos shown below are for educational purposes and are not a sponsorship of the life insurance company.

Immediate Annuity

An immediate annuity (SPIA) or income annuity is an insurance contract in which a consumer exchanges a lump sum of money with an insurance company for an immediate, irrevocable series of retirement income payments that are guaranteed for the specific period of the contract. Learn More.

Variable Annuity

A variable annuity is a tax-deferred investment product for retirement planning that allows you to participate in investments including stocks, bonds, and mutual funds. You get all the upside and the downside potential with a variable annuity.

Variable annuity products offer greater risk than other product types. You must seek a financial professional to find the best investment options.

Fixed Index Annuity

A fixed index annuity is a tax-deferred annuity contract for retirement planning that allows you to participate in a portion of the markets that provides principal protection from market volatility. Your retirement accounts get the opportunity to earn an average rate of return with no downside potential, and tax deferral. Learn More.

Fixed Annuity

A fixed annuity is a tax-deferred insurance product for retirement planning that provides a fixed guaranteed interest for the term of the contract similar to a Certificate of Deposit (CD). Learn More.

Your retirement savings earn a fixed amount of interest annually for a fixed period of time.

Long Term Care Annuity

A Long Term Care Annuity is a tax-deferred fixed annuity that provides an enhanced tax-free benefit to supplement qualified long term care services and facilities. Learn More.

Deferred Income Annuity

Deferred Income Annuities (DIA) is an income annuity contract in which a consumer exchanges a lump sum of money upfront for a deferred, irrevocable retirement income stream (similar to an immediate annuity) over a fixed period of time or lifetime. Learn More.

Two Tier Annuity

A two-tier annuity is a tax-deferred indexed annuity where you invest money upfront, grow your investment during the deferral period, and you annuitize your future contract values into an irrevocable fixed income stream of annuity payments.

Annuitization is required. Learn More.

Qualified Longevity Annuity Contract (QLAC)

A QLAC is a Deferred Income Annuity (DIA) funded specifically by a qualified retirement savings plan to defer Required Minimum Distributions (RMD). Learn More.

Structured Settlement Annuity

A Structured Settlement is a structured, irrevocable series of periodic payments from an insurance company commonly court-ordered similar to a SPIA. Learn More.

Secondary Market Annuity

A secondary market annuity is the resell of an annuitization distribution (income stream payments) in exchange for a lump sum now. Learn More.

Medicaid Annuity

A Medicaid Compliant Annuity is a unique immediate annuity meant to financially maintain a healthy elderly spouse’s lifestyle while their unhealthy spouse receives Medicaid. Learn More.

Single-Premium Deferred Annuities

Single-Premium Deferred Annuities are tax-deferred contracts that allows a one-time initial investment into a contract with no option to add to an existing policy.

Flexible-Premium Deferred Annuities

Flexible-Premium Deferred Annuities are tax-deferred contracts that allows an owner to contribute additional funds to an existing policy during the deferral period.

Annuity Standard Features and Terminology

Market Value Adjustment

A market value adjustment is a feature affiliated with fixed index annuities that can increase or decrease interest rates, caps and participation rates due to market conditions. Learn More.

Surrender Charges

Surrender charges are the withdrawal charge penalties you incur if the amounts are more than the allotted penalty-free withdrawal or cancel the contract prior to the term. Learn More.

Surrender Schedule

Also known as a surrender period is the term of the contract and the surrender charges affiliated with the surrender schedule. Learn More.

Penalty-Free Withdrawals

A penalty-free withdrawal is the amount of money in your policy that you can withdrawal from your policy without penalties. Learn More.

Systematic Withdrawals

Systematic withdrawals are scheduled withdrawals from your contract. Learn More.

Exclusion Ratio

The percentage of any returns that is not subject to income taxes.

The exclusion ratio is typically affiliated with non-qualified annuitizations.

Fees

Fees are the charges you incur for a benefit from the insurance company or financial institution. Learn More.

Spreads

Spreads are the amount of money the insurance company keeps prior to crediting your interest.

The Difference Between Fees and Spreads

Commissions

Commissions are the revenue an advisor or agent receives from the insurance company in exchange for selling annuities. Learn More.

Free Look Period

A free look period is a short window after you issue the annuity contract that allows you to change your mind if you decide you don’t want to go forth with the contract. Free look periods vary on products, but usually range between 10 to 30 days.

The Annuity Values

Accumulation Value

Your accumulation value (Account Value) is the current value your money is worth.

Minimum Guarantee Value

The minimum guarantee value in fixed index annuities is the minimum amount your money is worth guaranteed at any given time.

Cash Surrender Value

The cash surrender value is the value your contract is worth if you cancel the contract before the surrender schedule has come to term.

Income Value

The income value is the value applied to the optional income benefit or Guaranteed Lifetime Withdrawal Benefit.

Understanding the Different Values in Annuities

What is Annuitization?

Annuitization is the term referring to converting your funds in an irrevocable guaranteed stream of annuity income payments in retirement.

Period Certain

Period Certain is an annuitization payout for a fixed period of time. Learn More.

Life Only

Life Only is an annuitization payout for the rest of your life. Life only is sometimes referred to as a Life Annuity. Learn More.

Joint Life Only

Joint Life Payout is an annuitization payout for the remainder of a person and spouse’s lifetime (2 lives). Learn More.

Single Life with Period Certain

Life with a Period Certain is an annuitization payout for the remainder of a person’s lifetime with a guaranteed minimum payout term. Learn More.

There’s a version to cover you and your spouse too!

Lifetime Income with Installment Refund

Lifetime Income with Installment Refund is an annuitization payout for a person’s lifetime with the guaranteed remainder of the initial premium returned to a beneficiary at death over a period of installments. Learn More.

There’s a version to cover you and your spouse too!

Lifetime Income with Cash Refund

Lifetime Income with Cash Refund is a series of payments for a person’s lifetime with the guaranteed remainder of the initial premium returned to a beneficiary in a lump sum payment. Learn More.

There’s a version to cover you and your spouse too!

Cost of Living Adjustment (COLA)

A Cost of Living Adjustment is an annuitization payout option that increases your retirement income payment over time to help keep up with inflation. Learn More.

Interest Crediting Methods (Indexed Annuities)

Interest Crediting Methods are strategies you allocate in a FIA to earn interest.

Point to Point

A point to point crediting method is the measurement of growth in an index from one point in a given year to the same point of the following year(s).

Monthly Point to Point

A crediting method similar to the point to point strategy, but on a monthly basis.

Monthly Average

A crediting method where a snapshot of an index value on the same given day every single month is averaged over a 12 month period.

Daily Average

A crediting method similar to the Monthly Average, but on a daily basis.

Fixed Interest Strategy

A declared fixed amount of interest credited annually. The interest rate can change every year in a FIA.

High Water Mark

A crediting method that credits interest based on the highest performing benchmark over a period of time.

Cap

A cap is the ceiling a fixed index annuity owner can earn in any given interest crediting method.

Participation Rates

Participation rates are the percentage of the upside an index annuity owner can participate in when selecting a crediting method.

Renewal Rates

Renewal Rates are what the caps and participation rates renew at every anniversary or reset period.

What is the Reset Period?

Reset periods are the points in your fixed index annuity contract that credits interest you’ve earned to your policy. Interest is locked in at the point, and never go backward from there.

Annual Reset

Annual reset is a reset period of 1 year. Every year on the anniversary date, annual reset locks in the interest your policy has earned.

2 Year Reset

A 2-year reset is a reset period of 2 years. Interest earned is locked in every 2 years on the anniversary dates.

3 Year Reset

A 3-year reset is a reset period of 3 years. Interest earned is locked in every 3 years on the anniversary dates.

5 Year Reset

A 5-year reset is a reset period of 5 years. Interest earned is locked in every 5 years on the anniversary dates.

Which is the Best Annual Reset Method?

Income Rider

An Income Rider or Guaranteed Lifetime Withdrawal Benefit is an optional benefit or “add on” that distributes a steady stream of income for life in retirement for the remainder of the owner’s and/or owner and spouse’s lifetime. Learn More.

What’s the Difference Between Annuitization and an Income Rider?

Enhanced Death Benefit

An Enhanced Death Benefit is a benefit that delivers a greater death benefit than the Accumulation Value to an owner’s heirs. Enhanced death benefits are often used as an alternative to life insurance.

Return of Premium

Return of Premium is a feature in which a contract owner can terminate their current contract at any given time, and receive their original premium back (minus fees and withdrawals). Learn More.

Accumulated Penalty-Free Withdrawals

Accumulated Penalty-Free Withdrawals are unused penalty-free withdrawals that can roll over to the following year increasing the client’s penalty-free liquidity until withdrawn. Learn More.

Nursing Home Waiver

The waiver of surrender charges if a client is admitted to a qualified nursing home facility. Learn More.

Terminal Illness Waiver

The waiver of surrender charges if a client is diagnosed terminally ill not expected to live more than 12 months. Learn More.

Cost of Living Adjustment (COLA)

A Cost of Living Adjustment is the increasing of an owner’s income stream due to inflation.

Bailout Rate Feature

Bailout rate feature is the ability to terminate one’s contract if rates renew at a specific lower level. Learn More.

Spousal Continuation

Spousal Continuation is the ability for a surviving spouse at death to pick up the deceased’s annuity contract and continue the term.

Conclusion

Now we’ve gone over the various types of annuity products, it becomes a matter of which type is best for you.

Income Annuities offer the highest income payments but have the least flexible contracts.

Fixed Annuities are the most conservative product type in which you receive a fixed interest rate for a fixed period of time.

Fixed Indexed Annuities are the most moderate product types in which you get to participate in some of the market upside potentials but have all the downside protection from market risk.

Variable Annuities are most aggressive product type in which you can participate in all of the upside and downside of the markets.

Try to find an issuing insurance company with a high rating and financial strength.

If you have further questions, check out our Frequently Asked Questions section below, or feel free to ask me a question.

Annuity FAQ

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