What Are Fixed Annuity Premium Deposits Invested In

Fixed Annuities Vs Cds

In general, fixed annuity rates are about 35 percent higher than CD rates, Samuel Rad, a certified financial planner, told U.S. News and World Report.

Professor of retirement income Wade Pfau told Annuity.org that MYGAs are the annuity equivalent of CDs but provide tax deferral. Unlike certificates of deposit, annuities grow tax deferred, meaning you dont pay taxes until the money is withdrawn.

The other main difference between fixed annuities and CDs is that traditional fixed annuities and MYGAs are not insured by the Federal Deposit Insurance Corporation . Instead, theyre backed by the life insurance companies that issue them and by state guaranty associations.

How Does An Indexed Annuity Work

After you sign an indexed annuity contract, the insurance company invests your money into the market index of your choice. You can select a single index for your funds or spread your dollars across several indexes.

The most common index options include the S& P 500, the Nasdaq 100 and the Russell 2000.

In exchange for protection against losses, indexed annuities limit how much you earn, even in strong market years.

Thats why these contracts are considered less risky than investing directly in the stock market but also offer smaller potential gains.

There are several mechanisms insurers use to determine the change in the index over the time you have the annuity:

Annual Reset

Compares the change in the index from the start of the year to the end of the year. Declines are ignored.

High Water Mark

Looks at the index value at various points and takes the highest of the values and compares it to the level at the start of the contract.

Point to Point

Compares the change in the index rates at two preselected points in time. This can be the start and end of the contract term.

Index Averaging

Some index annuities average the value of the index daily or monthly, as opposed to the value on a particular date.

Annuities also offer tax advantages. Interest earned within an indexed annuity is tax deferred. You wont pay state or federal income tax on the interest until you withdraw it.

How Can You Use A Fixed Annuity

Say you’re 15 years from retirement. You have some money saved up and invested through a 401 or an IRA. But you’re not sure theyll provide enough money to support you through your retirement years.

If you have money available nowor can fit a new recurring premium payment into your budgetyou could put it into a fixed annuity. That would ensure that, on a designated date , youd start receiving additional income payments that could continue through the rest of your life.

Your fixed annuity’s interest rate could help you plan for retirement. Youd know precisely how much income the annuity would provide, which could help inform other decisions. For example, you might feel comfortable taking on higher risk with other investments, knowing that regardless of how they perform, the income payments from your fixed annuity would still be there for you throughout retirement.

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What Goes Into A Fixed Annuity Rate

Unlike variable annuities and indexed annuities, fixed annuities are not linked to stock market performance or another investment.

Instead, your money grows at an interest rate determined by the insurance company.

When an insurance company receives your money, it adds it to its general account pool of incoming premiums. The company then invests that money usually in government securities or high-quality corporate bonds that earn a slightly higher interest rate than the insurance company pays you.

Your fixed annuity contract will include a minimum guaranteed rate. The guarantee from the annuity company is that the interest on your fixed annuity will not dip below that rate. The company also guarantees the principal investment.

Some types of fixed annuities, such as multi-year guaranteed annuities, lock in the same rate for your entire contract. Others may adjust the interest rate after a certain time.

Are Annuities Only For Retirees

Annuities can be part of your financial picture in your working years as well as during retirement.

Because deferred annuities offer tax-deferral1, you have more time to grow your money without paying income taxes on earnings. In that scenario, if you choose a variable annuity, you may have the option to invest in the stock market for growth and to protect your principal for beneficiaries.

Two additional reasons you might purchase an annuity before retirement: 1) to roll over a workplace retirement account when you change jobs and 2) to continue saving after you reach 401 or IRA annual contribution limits.

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How Does A Fixed Annuity Compare To Other Annuities

A fixed annuity offers more stability and predictability than other types of annuities, at the cost of potential greater earnings on your principal. Other types of annuities, like variable annuities and indexed annuities, share certain features with a fixed annuity but may offer greater payoutsâand greater risks.

Variable Annuity Accumulation Units And Annuity Units

During the accumulation period, the variable annuity contract owner’s interest in the separate account is measured by accumulation units. Accumulation units track the shares of a variable annuity in the separate account, which is invested more aggressively for greater income. The number of accumulation units in the account is proportionate to the amount of money invested. These accumulation units are simply an accounting method of measuring the contract owner’s interest in the separate account.

The accumulation unit, calculated like the net asset value of a mutual fund, equals the total value of all securities held in the separate account divided by the number of accumulation units.

The number of accumulation units that can be purchased is the net payment, which is the premium payment after sales charges are taken out, divided by the market value of the accumulation unit, which is determined by the NAV at the next close of a market day :

Thus, the contract holder’s interest in the separate account at any given time is the number of accumulation units times the value of 1 accumulation unit.

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What Are The Tax Implications Of A Fixed Annuity

• Contributions to a fixed annuity are not tax deductible. Any deposit into the annuity is considered part of an individual’s adjusted gross income and is taxed accordingly.
• Earnings on a fixed annuity are taxed at ordinary income rates in the year they are withdrawn.
• There is no tax penalty assessed on withdrawals before age 59 1/2 however, any premature withdrawals taken before the annuity has been in place for at least five years will incur a 10% penalty in addition to the ordinary income rate.
• Individuals who are considering deferring annuity income should be aware of the applicable Required Minimum Distribution rules that apply when funds are withdrawn to avoid penalties.

Additional Or Ongoing Premiums

You might also make additional payments into an annuity if your contract and relevant tax laws allow you to do so. Depending on your insurance company and your preferences, you might be able to set up automatic monthly transfers via ACH. You also might write a check or make an electronic transfer on demand whenever you want to contribute more.

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How Do Annuities Work

With an annuity, you pay the annuity company premiums for a period of time, and then the annuity company starts paying you.

In general, annuities work through two different life stages

When Should You Consider A Fixed Annuity

That depends on many factors, including your age, your financial goals, your retirement plans, the resources you have available, the amount of risk you wish to take on, and how long you expect to live.

Have you maxed out your allowed Roth IRA or 401 contributions? Would you like to put more money away to help support yourself in retirement? If so, a fixed annuity may be worth considering. Knowing you’re getting a guaranteed returnand an ongoing income streamcan help build your confidence in your overall retirement savings plan.

Want to learn more about if a fixed annuity is right for you? Connect with a

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Types Of Fixed Annuities

An equity-indexed annuity is a type of fixed annuity, but looks like a hybrid. It credits a minimum rate of interest, just as a fixed annuity does, but its value is also based on the performance of a specified stock indexusually computed as a fraction of that indexs total return.

A annuity is one that combines two desirable featuresthe ability to select and fix the time period and interest rate over which your annuity will grow, and the flexibility to withdraw money from the annuity before the end of the time period selected. This withdrawal flexibility is achieved by adjusting the annuitys value, up or down, to reflect the change in the interest rate market from the start of the selected time period to the time of withdrawal.

What Is A Variable Annuity

A variable annuity is a contract between you and an insurance company. It serves as an investment account that may grow on a tax-deferred basis and includes certain insurance features, such as the ability to turn your account into a stream of periodic payments. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.

A variable annuity offers a range of investment options. The value of your contract will vary depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.

Each variable annuity is unique. Most include features that make them different from other insurance products and investment options. Keep in mind that you will pay extra for the features offered by variable annuities.

First, variable annuities have insurance features. For instance, if you die before the insurance company starts making income payments to you, many contracts guarantee that your beneficiary will receive at least a specified amount. This is typically at least the amount of your purchase payments. It may also offer additional insurance features such as promising you a certain account value or the ability to make withdrawals up to a certain amount each year for the rest of your life.

Tax Rules

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Exchanging One Variable Annuity For Another

In some cases you may wish to exchange an existing variable annuity contract for a new annuity contract that has features that you prefer. If you exchange contracts, you may be required to pay surrender charges on the old annuity if you are still in the surrender charge period. In addition, a new surrender charge period may begin when you exchange into the new annuity.

Remember:

• If you are thinking about an exchange, you should compare the two annuities carefully. While the features may appear similar, you should consider the fees , investment restrictions, and benefits and risks of the new variable annuity as compared to your current variable annuity.
• If you decide to do an exchange, talk to your financial professional or tax adviser to make sure the exchange will be tax-free.
• Consider the financial motivation your financial professional may have to recommend that you exchange one contract for another.

Relative Safety Of Principal

The life insurance company is responsible for the security of the money invested in the annuity and for fulfilling any promises made in the contract. Unlike most bank accounts, annuities are not federally insured. For that reason, buyers should only consider doing business with life insurance companies that earn high grades for financial strength from the major independent ratings agencies.

Annuities often have high fees, so it pays to shop around and consider other types of investments.

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Should You Get A Fixed Index Annuity

If youre investing for the medium- or long-term, and want some market exposure with less risk, the fixed index annuity could be a good compromise. Your long-run potential return is higher than if you kept all your money in a guaranteed account, like a fixed annuity or a CD. At the same time, you dont have to worry about a steep market loss.

Periodic Payment Deferred Annuity

Premiums are paid monthly, quarterly, or annually. The amount can be fixed or variable. There are 2 forms of periodic payment, the level premium and the flexible premium.

Level Premium

The level premium is a fixed premium paid during the accumulation period. The level premium is determined by the annuitant’s age and sex, the assumed interest rate, income amount and payment guarantee, and expenses, and obviously for periodic payments, how long the contract holder pays the premium. The more premiums paid, the lower the premium.

Because an annuity is paid for the annuitant’s lifetime, life expectancy is an obvious factor to consider when calculating premiums, which, in turn, will depend on the annuitant’s age at the start of the annuity period and sex, because women generally live longer than men. Some states, however, do not allow the premium to be contingent upon sex in these states the sex of the annuitant won’t matter. Another factor extending the time of the annuity period, for which premiums will be higher, is when a specific time period for payouts is guaranteed, or it is a joint-and-survivor annuity, which will likely increase the length of the annuity period.

The premium will obviously depend on:

Flexible Premium

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How An Annuity Works

Annuities are designed to provide a steady cash flow for people during their retirement years and to alleviate the fears of outliving their assets. Since these assets may not be enough to sustain their standard of living, some investors may turn to an insurance company or other financial institution to purchase an annuity contract.

As such, these financial products are appropriate for investors, who are referred to as annuitants, who want stable, guaranteed retirement income. Because invested cash is illiquid and subject to withdrawal penalties, it is not recommended for younger individuals or for those with liquidity needs to use this financial product.

An annuity goes through several different phases and periods. These are called:

• The accumulation phase, the period of time when an annuity is being funded and before payouts begin. Any money invested in the annuity grows on a tax-deferred basis during this stage.
• The annuitization phase, which kicks in once payments commence.

These financial products can be immediate or deferred. Immediate annuities are often purchased by people of any age who have received a large lump sum of money, such as a settlement or lottery win, and who prefer to exchange it for cash flows into the future. Deferred annuities are structured to grow on a tax-deferred basis and provide annuitants with guaranteed income that begins on a date they specify.

Deferred Vs Immediate Annuities

A deferred annuity receives premiums and investment changes for payout at a later time. The payout might be a very long time deferred annuities for retirement can remain in the deferred stage for decades.

An immediate annuity is designed to pay an income one time-period after the immediate annuity is bought. The time period depends on how often the income is to be paid. For example, if the income is monthly, the first payment comes one month after the immediate annuity is bought.

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Who Should Get An Indexed Annuity

Indexed annuities are best suited for investors who dont need the money right away. According to Annuity.org expert contributor Chip Stapleton, indexed annuities are most beneficial for investors with 10 to 15 years before theyll need income because theyll have time to weather any downturns that might reduce the annuitys return.

Most indexed annuities have some downside protection, said Stapleton, who is a FINRA Series 7 and Series 66 license holder and CFA Level II candidate.

It might even be a floor of zero, so youre never going to lose money, he said. But then your upside is also capped there too, so if you want to limit your bad, you also have to limit your good.

The market exposure of indexed annuities is mediated by downside protection, meaning that these products have a moderate amount of risk. Stapleton recommended this type of annuity for someone whos more risk averse but doesnt want to avoid risk completely.

Stapleton also pointed out that indexed annuities can be customized to fit the annuity owners financial circumstances.

You can design what youre investing in inside the annuity to tailor your risk profile more based on your goals, your time horizon and your general investment philosophy, Stapleton said.

The case study below provides an example of how someone about to retire can benefit from the features of an indexed annuity.

Are Fixed Annuities Securities

Fixed annuities are not securities because they offer a guaranteed interest rate. The return you earn isn’t affected by market fluctuations, and the insurance company offering the product takes on all the investment risk.

In contrast, variable annuities are considered securities because the return you earn is tied to the market performance of the investments in your subaccounts. That means you bear the investment risk. Variable annuities are subject to regulation by the U.S. Securities and Exchange Commission .

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