The most common difference between life insurance and an annuity is that life insurance helps provide financial security to your loved ones if you pass away. Annuities provide either tax-deferred growth or a guaranteed stream of income in retirement.

Life insurance and annuities are excellent options to consider for your retirement strategy. In this article, we’ll detail why.

What Does Life Insurance Do?

Life insurance’s focal point is to guarantee financial security for loved ones after someone passes away. Life insurance can financially secure your loved ones’ future since death benefits can replace your income and meet critical financial necessities.

How Life Insurance Works

Life insurance provides financial protection by issuing beneficiary payouts when you pass away. Your loved ones can use this money the way they see fit so they can maintain their standard of living. Life insurance contracts typically require monthly, quarterly or annual premium payments and the amount you pay depends on various factors.

Life insurance can cover the following expenses:

• Daily living costs
• Funeral costs
• College funds
• Mortgage payments
• And more

An important distinction to be made is that you don’t purchase life insurance for you; you purchase it for your loved ones.

What Do Annuities Do?

Annuities are insurance contracts that either provide tax-deferred growth or a guaranteed stream of income in retirement. Their primary purpose is to secure your retirement nest egg and provide financial security throughout. There are numerous types of annuities, including immediate and deferred, MYGAs, fixed, fixed-indexed, the list goes on.

The bottom line with annuities is that they provide numerous benefits, including:

• Tax-deferred growth
• Guaranteed principal with deferred fixed annuities
• Future income streams that can’t be outlived
• Probate avoidance
• The possibility for lump sum benefits that can be paid to your spouse or children upon your death
• And more

With income annuities, you can set up payments that last for your entire life, a specific period of time, or a combination of both.

How Do Annuities Work?

You can either buy an annuity with a lump sum of money or with premium payments made over time. The insurance company that provides the annuity then guarantees the terms of your annuity contract and invests your money accordingly, depending on the type of annuity you purchase.

You can buy annuities that begin payouts immediately, otherwise known as immediate annuities. Or you can buy annuities that delay payments until future dates, known as deferred annuities.

Life Insurance Details

Life insurance policies give you different options to choose from for your policy design and coverage duration. The policy type you choose depends on your needs. Some policies provide protection for a fixed number of years while permanent policies provide lifelong coverage and cash-value benefits. Permanent life insurance might also be the option to make withdrawals or borrow against your cash value.

You should also understand that life insurance policies have their drawbacks. The list of these drawbacks might include high mortality charges and fees. Also, a portion of policyholder premiums will typically go toward the insurance agent’s commission and this can hinder the savings growth portion of your life insurance policy.

Annual administrative and management fees can also mount, minimizing the benefits of the policy’s tax-sheltered growth. You might also struggle to clarify the fees structure; consequently comparing providers can prove difficult as a result. Unfortunately, a common occurrence is for policyholders to let their policies lapse due to their inability to continue making payments.

Because of their fees, some financial planners urge retirees to opt for lower-cost term insurance policies. They can then apply their savings toward other funds and financial products, such as a retirement plan or annuity. This structure lets policyholders make smaller life insurance payments and accomplish tax-deferred growth in their other accounts.

Some individuals might have already maxed out contributions toward their retirement plan accounts. In these cases, cash value policies might be an advisable option. This is especially true if they choose low-fee providers and have time to let their cash accrue.

High net-worth individuals might also place cash value policies into irrevocable life insurance trusts. Doing so can reduce their beneficiaries’ tax obligations.

Annuity Details

Whether fixed, fixed-indexed, or variable, the popularity of annuities has steadily increased over the years. Fixed annuities credit your account based on a guaranteed rate while variable annuities feature returns that depend on the stock or bond fund sub-accounts. Fixed-indexed annuities guarantee downside protection, with interest earnings determined by the performance of the selected  underlying indices, such as the S&P 500 Index.

Immediate annuities are best intended for those nearing or in retirement who need an immediate stream of income. Deferred annuities are best intended for those who can afford to let their money grow tax-deferred.

Most annuities are purchased with a lump sum, but some annuities will allow funding via periodic payments. You can also select the time you want your payouts to begin. You should also understand your payout and/or surrender options when you select an annuity. This determines when and how you will receive your income stream or cash out your annuity.

Annuities don’t come without potential fees, so you should speak with an annuity specialist who can walk you through their fee structure. For example, surrender fees issue penalties to annuitants for withdrawing funds too early or canceling the contract.

This means the money in annuities can be illiquid for a long period of time. Because of this, annuitants often sustain hits on distributions during the initial years of their contract.

Those considering annuities should also understand the tax treatment in detail. Earnings will grow on a tax-deferred basis when left to compound inside the contract. But if a policyholder withdraws funds before age 59 1/2, interest gains are subject to ordinary income tax and a 10% tax penalty imposed by the IRS.

All things considered, fixed annuities can be an excellent choice for anyone looking to secure their principal or for a guaranteed stream of income into their later years. Annuities are the only way to guarantee a stream of lifetime income that you cannot outlive.

Bottom Line – Annuities Vs. Life Insurance

Regarding life insurance and annuities, the most important thing to understand is that they both serve definitive purposes. You should consider them before you enter retirement to determine which best suits your needs. They might serve your needs in different ways at different times.

It’s also important to understand how you can implement them into your retirement strategy. At AnnuityAdvantage, we believe you should have a trusted annuity advisor who can guide you, in an informed way, to the annuity product that makes the most sense for your individual goals for the future.

Contact us today at 1 (800) 239-0356 to learn more about how we can help ensure you get the most out of your retirement strategy.

The post What Is the Difference Between Annuities and Life Insurance? appeared first on AnnuityAdvantage.

In this article, we’re discussing what income annuities are and how they work. Income annuities let you convert portions of your retirement savings into guaranteed income streams. You can purchase an annuity with a lump-sum premium or through flexible payments over time.

In return for these premiums, you will receive payouts at agreed-upon intervals (monthly, quarterly, semi-annually, or annually).

If you’re wondering whether income annuities are the right decision for you, consider contacting the annuity professionals at AnnuityAdvantage. For over 25 years, we’ve guided our clients to the annuity product that best fits their retirement needs. Continue reading to learn more about income annuities and how they might be the best option for your retirement.

How Do Income Annuities Work?

Income annuities are designed to distribute a sum of cash (premium deposit) into regular income payments over time. These insurance contracts involve the annuitant paying a specified amount of money, and in exchange, having an insurer make regular income payments for a certain length of time or the rest of his/her life depending on the contract.

With income annuities, you will likely have the option to receive payments, monthly, quarterly, or yearly depending on your needs. Income annuities typically start payments within a year, which is why they are often called immediate annuities. However, they can also be categorized as deferred income annuities with payments beginning at a future date of your choosing, more than one year down the road.

Unlike other annuities, immediate income annuities are annuitized immediately, with payments typically beginning one month after contract issue. This is in opposition to accumulation or deferred annuities. People have the option to never annuitize or delay annuitization for long periods of time with deferred annuities.

As with other annuities, income annuities are complex financial products that require significant deliberation. If you’re considering purchasing an annuity, you should consult a professional and ensure you understand all of the fine print. You should ask about commissions and fees, state premium taxes if applicable, and understand the free-look period.

When Do Income Annuity Benefits Typically Begin?

One of the most attractive features of income annuities is their ability to provide guaranteed income during retirement. You can customize your annuity contract so income payments begin immediately or at a later date.

With immediate income annuities, payments begin within a year of the annuity’s purchase date. With deferred income annuities, income payments begin at least one year after the initial purchase. These types of annuities might be a preferable option if you don’t plan to retire for some time or you don’t need income right away.

What Are the Pros and Cons of Income Annuities?

As with any other financial decision, income annuities pose pros and cons you should consider before making a final decision. The most substantial benefit of income annuities with a lifetime payout is the assurance you won’t outlive your retirement savings. Because insurance companies guarantee your payments with the annuity contract, you will have guaranteed income for as long as the contract stipulates. Lifetime payouts are the most popular option selected.

Pros of Income Annuities?

Some other pros of income annuities include the following:

• Customizable payment term and income start date.
• Tax-favored income for non-qualified funds via an exclusion ratio.
• Predictable and protected income guaranteed by a financially sound insurance company.

Cons of Income Annuities?

The most obvious example of a drawback to income annuities is that they often pay a fixed amount of income and inflation can eat away at your purchasing power over time. Insurance companies make inflation riders available which increase income payments annually so you can reduce or eliminate the negative consequences of inflation. However, these riders typically decrease the initial amount of income you will receive from a set deposit amount, so a complete analysis of the rider’s impact to your overall payment structure must be taken into consideration before deciding if it makes sense for your individual situation or not.

Some additional cons of income annuities:

• Income annuities may not provide money for your heirs.
• Once purchased, income annuity funds typically do not easily convert into cash.
• Lack of flexibility. Once annuitized, you won’t be able to make any alterations to your payment schedule, even if your circumstances change in the future.

How Much Income Can You Expect to Earn from an Income Annuity?

Unlike certificates of deposit, lifetime income annuities do not provide a fixed return. Instead of a fixed rate, you receive an agreed-upon payment amount based on your life expectancy at the time payments begin. The total payout from your annuity depends on how long you live. The longer you live, the more total income you will receive.

If you structure payments to only last for your lifetime, you stand to receive larger incremental payments. If you are willing to accept lower monthly payments, you might be able to structure your annuity payout to provide for you, your spouse, or other beneficiaries after you die.

Ultimately, how much money you receive from an income annuity depends on your age at issue, the amount of premium deposit, how long you live and the payment options selected.

Longevity Risk Protection

A lifetime income annuity insures against the risk of living longer than average.

Risk-pooling and guarantees are what make lifetime annuities so valuable. With lifetime income annuities, the 50 percent of people who die earlier than average subsidize those who live longer. Since you don’t know which half you’ll be in, it makes sense to reduce your risk...especially if you are healthy and your family has a history of long lives.

Income Annuity FAQs

Who Guarantees Income?

The insurance company that issues the annuity guarantees your income. Because of this, you should make sure the company is financially sound with high ratings and that you understand the way they structure their annuities.

What Is the Rate of Return On an Income Annuity?

Income annuities do not operate like an investment that provides you with a rate of return over fixed periods of time. With income annuities, you’ll receive a set monthly income guaranteed for a specific period of time or life.

This guarantee is independent of market performance and the total payout is based on your life expectancy when selecting a lifetime payment stream. With income annuities that provide guaranteed income for life, the longer you live, the more total income you will receive.

How Soon Will Payouts Begin?

The date when your payouts begin depends on the agreement between you and the insurance company. Payouts might begin right away or they can be put off until a later period. With a single-premium immediate annuity (SPIA), you start receiving income within 12 months of your purchase.

With a deferred income annuity (DIA), your payments won’t begin until sometime between two to 40 years. However, as with a SPIA annuity, you will have the option to receive monthly, quarterly, semi-annual, or annual payments.

Bottom Line – How Does an Income Annuity Work?

Income annuities might be an excellent choice for you if you’re looking for guaranteed income throughout your retirement. However, there are some elements to consider when choosing your annuity.

That’s why we recommend that you consult an experienced annuity advisor who understands your financial needs and who can put you on the right path for your retirement. For over twenty-five years, we at AnnuityAdvantage have provided our clients with expert advice that positions them in a comfortable spot for their retirement goals.

Contact us today to learn more about how AnnuityAdvantage can help you with your retirement goals.

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In this article, you’ll learn the most important tax implications of different types of annuities. We discuss how qualified and nonqualified annuities differ in their tax structures and various tax rules involved in annuities. Learning these key points will ensure you feel comfortable with your tax-deferred retirement savings.

Since 1999, AnnuityAdvantage has been a leader in providing people with the annuity products that fit their financial needs best. With an extensive selection of fixed-rate (MYGA), fixed-index, immediate income and deferred income annuities, our friendly, experienced team of annuity agents can guide you through the selection process. Your golden years are meant for enjoyment, not worrying about finances. AnnuityAdvantage ensures you find the right annuity product for your financial retirement goals.

Qualified Annuity Taxation

If you purchase an annuity with money that has not been taxed, it is considered a qualified annuity. These categories of annuities are typically funded with money from 401(k)s or other tax deferred retirement accounts, such as traditional IRAs.

Once you begin taking withdrawals or receiving payments from a non-ROTH qualified annuity, the money received becomes fully taxable as income. The reason for this is because the money you used to fund the annuity has never been taxed. For example, if you buy a $100,000 annuity and receive $6,000 back in an annual payout, you are required to report the entire $6,000 as taxable income.

Non-Qualified Annuity Taxation

If you purchase your annuity with after-tax funds, it is considered a non-qualified annuity. After-tax money means the IRS has already taxed the money used to purchase the annuity. In a non-qualified annuity, only the earnings are taxed.

Annuity withdrawals made from a non-qualified deferred annuity are taxed on a Last In, First Out (LIFO) basis, meaning that accumulated interest earnings are considered to be withdrawn first, before you get any of your tax-free principal back.

Non-qualified income annuities use what is known as an exclusion ratio to determine the amount of income you need to claim. The exclusion ratio determines the percentage of taxable income vs. the percentage of non-taxable return of principal that is included in each income payment. The exclusion ratio takes into account how long you’ve held the annuity before starting income, how much interest you’ve earned and how long the payments will last.

Further Information On How the Exclusion Ratio Works

For further reference on the exclusion ratio, let’s assume you purchase a nonqualified, immediate annuity at age 65. The insurance company determines you have a 20-year life expectancy and agrees to pay a set amount per month for the rest of your life. Your initial investment is expected to earn a return over the next twenty years and the insurance company spreads your principal investment over that time period.

Your annuity pays you $500 per month but your principal investment only accounts for $400 of the $500 monthly payment. The remaining $100 of your monthly payment is considered interest earnings and is the only taxable income in this instance, since $400 is considered a return of your original principal and it has already been taxed. In this case, your exclusion ratio would be 80%, since 80% of your monthly payment has already been taxed.

Further Tax Information On Qualified and Nonqualified Annuities

As previously discussed, qualified annuities are purchased with pre-tax funds, such as IRAs, 401(k)s, and 403(b) plans. Immediate-qualified annuities typically have the highest tax consequences because the return of the money used to buy the annuity and all of the earnings are taxable. Since you start receiving these payments immediately, you start paying taxes immediately.

One of the easiest ways to reduce taxes with annuities is by shifting money from fully taxable investments, such as bank CDs, money market accounts and bonds, into a nonqualified tax-deferred annuity. Shifting your money into a nonqualified deferred annuity helps you avoid taxation on your interest earnings, giving you the flexibility to decide when is the most strategic time to withdraw those earnings.

Annuity Withdrawal Taxation

The biggest tax considerations for withdrawals should be how and when you make your withdrawals. The 59 ½ rule is a critical tax law to consider. It stipulates that if you withdraw money from an annuity before you turn 59 ½, you will incur a ten percent penalty on the taxable portion of the withdrawal.

After age 59 ½, withdrawing your money as a lump sum rather than an income stream triggers income tax on your accumulated earnings. If you decide to do this, you will have to pay income taxes on the entire taxable portion of your funds.

The tax status of the contract, be it qualified or nonqualified, determines how much of your withdrawal will be taxed. In non-ROTH qualified annuities, since the entire annuity is taxable, all of your withdrawal is taxable. In nonqualified annuities, you only pay taxes on the earnings portion of the withdrawal.

Another tax related benefit of annuities is that you are in control as to when you take withdrawals and recognize taxable interest earnings. However, qualified annuities held as non-ROTH retirement accounts are subject to required minimum distribution (RMD) rules. These rules stipulate that you must start taking withdrawals annually after age 73.

Conversely, nonqualified annuities are not subject to RMD rules, so you can accumulate interest without paying tax for as long as you like. This gives you the ability to benefit from additional years of tax deferred growth because you don’t need to make annual withdrawals, at any age.

Another taxing component you should understand is that the earnings you withdraw from all deferred annuities is taxed as ordinary income rather than long-term capital gains, regardless of the type of annuity.

Some Additional Considerations About the 59 ½ Rule

The 59 ½ rule stipulates that you will owe a 10 percent tax penalty on the interest earnings if you withdraw money from your annuity before reaching the age of 59 ½. This penalty is in addition to the ordinary income tax due on the withdrawn earnings.

However, there are some extenuating circumstances to this rule, such as having a permanent disability or terminal illness at the time of your withdrawal. In this case, the IRS will waive the 10 percent tax penalty.

Surrender Charges

In addition to tax penalties, withdrawals can also be subject to early surrender charges from the annuity issuer. Surrender charges can occur if the withdrawn amount exceeds the penalty-free amount during the surrender charge period. These charges vary based on the annuity product you choose. You should take both your potential tax implications and surrender charges into account when deciding on the annuity that best fits your needs.

Annuity Payout Taxation

Annuity payouts have a slightly different tax structure than direct withdrawals. In a nonqualified annuity that has been annuitized (annuitization), each monthly payment contains a tax-free portion that is considered a return of your original premium deposit and a taxable portion that is your interest earnings.

Nonqualified annuities in the payout phase are structured so they evenly portion the original principal amount over the course of the expected annuity payout term. The earnings portion in your payments that has not been taxed is the only portion subject to income taxes. With qualified annuities, since none of your principal investment used to purchase the annuity has been taxed yet, all of your payout is taxable.

When making withdrawals from a non-annuitized deferred annuity, it should also be noted that IRS rules state you must withdraw all of the taxable interest earnings before withdrawing your tax-free principal. This means you have to pay all of your taxes upfront if you want to start making withdrawals. One tactical move you can make to avoid this tax drawback is to annuitize or exchange an existing fixed-rate, fixed-indexed, or variable deferred annuity into an income annuity.

Inherited Annuity Taxation

If you are inheriting a nonqualified deferred annuity as a beneficiary, there are a few things to consider with regard to taxation. The first determining factor of annuity taxation is whether you’re the spouse of the deceased annuity owner. If you are, you can usually assume ownership, keeping the existing annuity in tact with the same terms. The tax structure won’t change, and you won’t incur any tax penalties.

If you’re not the spouse, there are typically four options to choose from for your payout:

1. Lump sum payout option: you can opt to take the remaining balance from an inherited annuity in a lump sum. In this case, you would have to report the entirety of the taxable portion of the annuity on your tax return.

2. Five-year rule: the five-year rule lets beneficiaries spread out the payments over five-years, which carries some tax deferral benefits.

3. Nonqualified stretch: in a nonqualified stretch option, the beneficiary can stretch the annuity withdrawals over the rest of their life. Their life expectancy would determine the withdrawal amounts and schedule. Not all insurance companies offer this option.

4. Period Certain or Life Annuitized Payout: the contract is annuitized and you receive payments for either a set period of time of for the remainder of your life.

The options that spread out your tax liability the most are the nonqualified stretch or lifetime annuitization. However, in this scenario, you will wait longer to receive the remaining money in the annuity. The lump sum payment method would give you access to the money faster. However, you would take a harder tax hit in the short-term.

Some Other Things Beneficiaries Should Consider

• Children of the annuitant who are beneficiaries are also only required to claim the untaxed portion of the annuity on their tax return.
• If you name a charity as the beneficiary, you can fully or partially offset tax liability.

Rollovers

401(k)s, IRAs, 403(b)s, and pension lump sum payouts can be rolled over into any type of qualified annuity without incurring taxes.

Deductibility

The same deductibility limits apply to qualified annuities for contributions as IRA, 401(k), 403(b) or other qualified plans. You can visit the IRS website for the deductibility limits for IRAs. Premium payments made to nonqualified annuities are not tax deductible.

Exchanges

Exchanges in annuities are relatively simple. You can exchange nonqualified annuities tax-free for a different nonqualified annuity. This is what is referred to as a 1035 exchange. You can also exchange any annuity that has an unappealing product design for one that has more attractive features or one that pays a higher interest rate.

QLACs Reducing and Deferring RMDs

Qualified longevity annuity contracts (QLACs) are qualified annuities that meet IRS requirements and let you exclude up to $200,000 of your IRA balance from RMDs, with payments delayed to as late as age 85. Excluding up to $200,000 of your IRA from RMD requirements until as late as age 85 reduces your taxes until payments begin and allows your money to continue to grow and compound. While your QLAC income is 100% taxable, it’s money you would eventually have to withdraw from your IRA anyway, so it doesn’t worsen your tax situation. In 2023, the maximum amount you can allocate to a QLAC is $200,000.

AnnuityAdvantage Is Here to Help

Understanding annuity taxation and the tax deferral benefits that each prospective annuity provides is important. This should help determine whether you opt for a qualified or nonqualified annuity, or an immediate or deferred annuity. Having an annuity agent on your side whose concern is to offer you the most beneficial annuity for your individual needs can help you make informed decisions that are in your best interest.

At AnnuityAdvantage, we believe you should view your annuities as an integral component of your retirement portfolio. You shouldn’t have to stress about tax implications affecting your finances and whether you can achieve tax deferred growth in retirement. You should be able to rest easy knowing you have the most effective annuity for your financial needs and desires.

Our team of annuity specialists can help ensure you get the most out of your golden years. Contact us today to start planning your best future with AnnuityAdvantage.

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Longevity annuity payments can either be based on a single life or on a joint life basis (typically with a spouse). You can buy these annuities with a lump sum payment or a series of premium deposits. In exchange for these deposits, the insurance company guarantees a lifetime income to begin at a certain age defined in advance and selected by the contract owner. The longer you defer your income payments, the more substantial payout you will receive when you reach the specified age in the contract.

Why Are Deferred Income Annuities Also Called Longevity Annuities?

Deferred income annuities are also referred to as longevity insurance or longevity annuities because they guarantee your income late into retirement and insure you against the financial risk of living a longer than expected life and running out of money. This can help you plan more adequately for retirement. With a portion of your retirement portfolio allocated to providing income guaranteed for the later years of life, you can focus more intently on the earlier stages of your financial retirement plan. Rather than dealing with the uncertainty that can result from planning for thirty or forty years of retirement, you can reduce this planning period to around 15 years (age 65-80) for example.

How Does a Deferred Income (Longevity) Annuity Work?

Deferred income annuities feature a deferral period, during which the assets you deposit accumulate. You can make deposits in a lump sum or series of premium payments, but the intention of these deposits is that you accumulate for guaranteed income later in life.

When trying to understand deferred income (DIA) annuities, you can break the product name down into its components. First, let’s start with the purpose of a deferred income annuity. The purpose of a deferred income annuity is to provide you with income.

Next, let’s consider the deferred portion of a DIA. Deferred income describes a scenario where the annuity begins payments at a specified future date. During the deferral period, the insurance company invests your money on your behalf. The longer your deferral period and the more advanced your age, the more income you receive once payouts begin.

Qualified, Nonqualified, and QLAC Longevity Annuities

Qualified annuities are purchased with pre-tax money from 401(k), traditional IRAs, or other qualified plans. Longevity annuities purchased with qualified funds are subject to RMD distribution rules, meaning you must receive income by age 73.

One of the benefits of purchasing a longevity annuity with nonqualified funds is that these annuities aren’t subject to RMDs. Therefore, you can start income at any age you want rather than at the maximum age of 73 as is the case when using qualified funds. The taxes on the distributions are also lower because income payments are considered partially a return of the money used to purchase the annuity which has already been taxed.

Qualified Longevity Annuity Contracts (QLACs) offer a middle ground between qualified and nonqualified longevity annuities. You can use qualified (IRA) pre-tax savings to purchase them and they aren’t subject to RMDs, so you don’t have to begin income payments at age 73. You can eliminate RMDs on the portion of money allocated to a QLAC and defer income payments up to as late as age 85. However, the IRS does impose limits on the amounts that can be allocated to a QLAC.

Who Benefits From a Longevity Annuity?

Longevity annuities are an effective way to ensure a guaranteed source of income in retirement. That doesn’t mean they are the best annuity for everyone. You also shouldn’t purchase an annuity with your entire portfolio. Diversification is a critical component of any retirement plan and annuities can help support a well rounded retirement portfolio. The following financial considerations indicate when a longevity annuity might be the right decision for you:

• Social Security and/or pension benefits won’t cover your expenses.
• You plan on retiring early and need a strategy for guaranteed income later in life.
• You’ve accumulated a large amount of retirement savings (typically exceeding $500,000).
• You are in good health and there is a history of longevity in your family.
• You’re seeking an insurance product to add security to your retirement portfolio.
• You don’t need immediate access to a portion of your retirement funds.

On the other hand, if the following factors sound like you, a longevity annuity might not be the ideal decision:

• You’re comfortable with your pension benefits and social security covering your expenses.
• You’re younger than 45 or over 75 years old.
• You’ve accumulated retirement savings below $500,000.
• You’re more focused on growth in your retirement savings rather than income.
• You need immediate or near term access to your money.

When considering longevity annuities, it’s important to remember these financial products should not be viewed as an investment, since they’re not designed to return your premium deposit in a lump sum with an interest return. You are essentially surrendering your funds to the issuing insurance company in exchange for a guaranteed future stream of income. Other annuities, such as MYGA annuities, can accumulate interest earnings and return your full premium deposit, with added interest, in a lump sum if desired.

Longevity annuities are intended to provide a dependable source of income in the later years of retirement. Using only a portion of your retirement funds to purchase a longevity annuity still frees the majority of your assets to provide liquidity and market upside.

The Qualitative Financial Value of a Longevity Annuity

When examining whether a longevity annuity is right for you, you should ask yourself about the value you can expect to receive. More often than not, pre-retirees take a quantitative approach to this value. In other words, they look for an internal rate of return (IRR) or their ROI. The value of a longevity annuity cannot be seen when looking at it from this perspective. The reason for this is that you can only calculate your IRR and ROI based on a lifespan estimate. The longer you live, the higher the IRR becomes over time. When considering longevity annuities, you should examine the quantitative return in addition to the qualitative risk reduction these products provide.

Diversifying With a Longevity Annuity

Most people agree that a diversified investment portfolio is superior to a one-dimensional plan. This doesn’t change in retirement. During your younger years, most financial advisors will tell you your portfolio should gravitate toward equity investments. As you prepare for retirement, your portfolio should shift to more fixed income assets. These assets provide stable, reliable income that is either uncorrelated or inversely correlated with equity markets. Longevity annuities accomplish this aim. On top of that, they provide income for as long as you live.

By adding the security of a longevity annuity to your retirement portfolio, you can achieve a higher rate of return in other areas. Longevity annuities accomplish this by potentially generating enough income to cover all of your retirement expenses. This gives you the flexibility to continue investing in equities for longer periods of time. Longevity annuities also give you the benefit of being able to invest and manage the rest of your portfolio for a set time period, knowing that you have a future income stream locked in and guaranteed.

Let AnnuityAdvantage Guide You To the Annuity That Suits Your Retirement Plans

Longevity annuities can be an excellent decision for anyone looking to guarantee their income during late retirement. These annuities let retirees budget more thoroughly and free them to focus on growth opportunities in early retirement.

Choosing the correct annuity for your retirement takes careful deliberation. The annuity agents at AnnuityAdvantage are here to answer all of your annuity questions. You should consider a longevity annuity if you plan on retiring early, already have a substantial amount of savings, need to secure guaranteed future lifetime income, and don’t need immediate access to this portion of your retirement funds.

Contact us today to find out if a deferred income annuity is right for you.

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Unlike traditional fixed annuities, MYGA annuities guarantee a set interest rate on your premium deposit for a specified period designated in the contract. This guaranteed interest rate typically lasts anywhere from 2-10 years and it is the reason why these types of annuities are often compared to bank certificates of deposit (CDs).

How Do MYGA Annuities Work?

MYGA annuities accumulate interest over a specified period of time with a lump sum premium deposit used to purchase the annuity. If the owner needs to withdraw money from the annuity before the guarantee period ends, they may have to pay surrender charges, depending on the contract. However, many annuity products feature penalty-free withdrawal provisions (typically around 10% annually) that let you make partial withdrawals before the surrender period is over.

Once the initial guarantee period is over, the insurance company will give you the opportunity to renew for another term at a new interest rate. If you decide to accept the renewal rate, your same annuity contract will continue to accrue interest at the new rate. If the new rate is not acceptable, most MYGA annuities offer a penalty-free withdrawal window, during which, you can cash out or complete a transfer or exchange to a new annuity with a different company. Transferring a non-qualified annuity to a higher yielding annuity with a new company is accomplished via a tax-free 1035 exchange. Lastly, you can choose to withdraw your entire contract value without penalty.

Primary Benefits of MYGA Annuities

The primary benefits of MYGA annuities are their tax-deferral capabilities and higher interest rates when compared to bank certificates of deposit. Because CD interest rates struggle to keep up with inflation and tax your interest earnings each year, MYGAs can be a better financial product to protect yourself against inflation. They also typically feature withdrawal provisions that save you from incurring penalties.

Supplemental Benefits to MYGA Annuities

• Purchasable with both non-qualified or tax-qualified IRA funds
• Liquidity options for penalty free and systematic withdrawals (Get Income Now)
• Lifetime income options available (Guarantee Future Income)
• Free from market risk and price fluctuations
• Guaranteed principal
• Avoids probate, passing to named beneficiaries at death
• No fees, loads or upfront sales charges

How Are MYGA Annuities Similar and Different From CDs?

Certificates of deposit are similar to MYGA annuities because they guarantee interest for a specific period of time. CDs are guaranteed by the FDIC, whereas MYGA annuities are contractually guaranteed by the government-regulated “legal reserve” insurance company that issues them. One of the most important differentiating factors of MYGA annuities is that they can potentially provide higher interest earnings than CDs.

CD interest rates haven’t kept pace with inflation over the past years, which means your money in a CD is actually losing purchasing power. Additionally, the little interest generated in a CD is taxable each year, even if you elect not to withdraw it. On the other hand, MYGA annuities guarantee your interest at an average rate that is typically much higher than a bank CD of the same term. They can also eliminate the annual tax burden because taxes are deferred and not owed until interest earnings are withdrawn, at a time of your choosing. This represents some of the tax-deferred interest growth benefits of a MYGA annuity.

MYGA Annuities Vs. Traditional Fixed Annuities

MYGA annuities are a type of fixed annuity but they differ from traditional fixed annuities in the way that their interest guarantees are structured and paid. MYGAs guarantee a set interest rate for a multi-year period of time, typically 2-10 years. Once the initial guarantee period is up, you will usually have a few options to choose from regarding a renewal interest rate, should you decide to continue your contract. Traditional fixed annuities might only provide a stated interest rate for the first contract year and then declare a new rate for each subsequent year, at the discretion of the insurance company, with an underlying minimum interest rate guarantee. For example, you might purchase a traditional fixed annuity with a seven year surrender term where only the first years interest rate is known in advance.

Who Is a MYGA Annuity Good For?

MYGA annuities are particularly appealing to someone close to —or already in— retirement. Because most retirees are living off savings, they might have a substantial amount of money tied up in savings accounts. This money becomes less and less valuable the longer it stays in the account due to inflation. While having savings for an emergency fund is advisable, there’s no sense leaving a significant portion of your money in your savings account when it could be generating a much higher interest rate.

Those purchasing a MYGA annuity should be comfortable with having limited access to the funds used to purchase the annuity. For example, purchasing a 3-year MYGA annuity with $75,000 worth of savings could give you a sizable interest return if you don’t need to access that money. Because the interest rate is fixed for those three years, you wouldn’t have to worry about your interest rate fluctuating, allowing for smarter budgeting. At the end of your MYGA’s initial guarantee period, you also have flexibility. It’s not just the higher interest rates and more favorable withdrawal policies compared to CDs that make MYGA annuities appealing. MYGAs can also give you the freedom to reevaluate after a short period of time.

MYGA Rates

MYGA interest rates fluctuate depending on the economic environment as well as the insurance carrier and can change daily. For example, the highest MYGA rates for a 5-year MYGA annuity in early December of 2022 was 5.65%. These rates compound annually and as mentioned earlier, are usually much higher than a bank CD of the same term. Typically, the more limitations you have on your MYGA’s penalty free withdrawal provisions, the higher your interest rate will be.

Withdrawal Provisions

Withdrawal provisions are contract stipulations that allow you to withdraw certain amounts without penalty before your surrender term is up. Without these provisions, you will have to pay surrender fees. Most MYGA annuities feature penalty free withdrawal provisions, many of which let you withdraw up to 10% of your annuity value each year. It’s important to note that withdrawal provisions depend on the individual MYGA contract. MYGA annuity contracts might also lay out plans for emergency withdrawals that prevent you from having to pay surrender fees under certain circumstances, such as a long-term nursing home stay or terminal illness. Regardless of withdrawal provisions, one of the most important benefits of your MYGA annuity is the tax-deferred interest it can accumulate for distribution at a later date.

MYGA Taxes

MYGAs offer tax deferral on interest that is compounded annually. This can generate wealth exponentially since you only incur taxes when you withdraw your interest earnings. You can liken this to investing in an IRA or 401(k) without contribution limits.

Your tax treatment will vary depending on whether you use qualified or nonqualified funds to purchase your annuity. For example, if you use money from your traditional IRA to purchase an annuity, you will pay taxes on both the principal and the interest when you withdraw your money. If you use nonqualified funds, you will only pay taxes on the interest portion. This benefit is not exclusive to MYGA annuities.

Let AnnuityAdvantage Guide You to the Right Annuity for Your Retirement

When making any significant financial decision, it’s important to ensure you have the right guidance. Choosing the annuity that suits your retirement goals is no different. Having a competent licensed annuity agent that puts your best interest first can mean the difference between enjoying your golden years and regretting your decision. 

AnnuityAdvantage is the easy, informed way to make the most out of your annuity purchase. Since 1999, we’ve been guiding clients through the annuity selection process. Contact us today and plan your future with AnnuityAdvantage. Our principal-secured annuities can help lead you to the financial freedom you desire during your golden years.

The post What Are MYGA Annuities and What Can They Provide You? appeared first on AnnuityAdvantage.

In this article, we’re discussing the differences between fixed, fixed-index, and variable annuities. Fixed and variable annuities can either be immediate or deferred. For more information on the difference between immediate and deferred annuities, you can visit our articles that explain more about these two categories of annuities by clicking the embedded links below.

If you’re interested in the different types of annuities and how you can better prepare for or implement your retirement plan, continue reading. Additionally, if you’re interested in consulting a professional about the potential for annuities in your retirement plan, AnnuityAdvantage has been guiding people to the annuity that fits their retirement needs for over 25 years and we can help to ensure you understand all of the specifics about your annuity before making a decision.

What Are Annuities?

Annuities describe contracts with insurance companies where you make premium payments in exchange for a fixed interest rate, a variable return or an immediate or future stream of guaranteed income. The funds in a deferred annuity accumulate on a tax-deferred basis regardless of the type of product you select. Because you don’t have taxes to pay on the growth in your annuity contract until withdrawn, annuities have become a popular way to accumulate funds for retirement.

What Is a Fixed-rate Annuity?

Fixed-rate annuities, also known as multi-year guarantee annuities (MYGA), describe insurance-based contracts typically funded with a lump sum premium payment. In exchange for the payment you make, insurance companies will credit your contract with an interest rate that is guaranteed for a pre-determined period of time, typically 2 to 10 years.

At the end of the initial guarantee period, you can cash out your annuity, renew it for another term, or exchange it for a better offering from another insurance company via a 1035 exchange. Fixed-rate annuities have guaranteed-minimum interest rates specified in their contracts. Though your rates can adjust after the initial guarantee period has ended, it will never fall below the guaranteed rate specified in the contract. This minimum guaranteed interest rate acts as your floor during periods of low interest rates.

Fixed-rate annuities give annuity owners a flexible option for tax-deferred accumulation as well as income options that last a lifetime. Their guarantees depend on the financial strength and claims-paying ability of the issuing insurance company.

Immediate Fixed Annuities

Immediate annuities are typically funded with lump sum payments to insurance companies and payments begin within 30 days. Income payments can also be deferred for up to 12 months. Payment frequency can be monthly, quarterly, semi-annually, or annually for a guaranteed period of time or for life. The duration for these payments will be specified in the contract. With immediate fixed annuities, only the interest portion of each payment will be considered taxable income and the rest is considered a tax-free return of your principal.

Deferred Fixed Annuities

Deferred fixed annuities can be funded with a single lump sum premium payment or regular payments to an insurance company over time to build interest and accumulate funds during the accumulation phase. By postponing taxes while funds accumulate, you can grow it instead of paying taxes on it. This example of tax-deferral is one of the most appealing aspects of annuities. Earnings are not taxed until they are withdrawn, at which time they are considered ordinary income.

Fixed-Indexed Annuities

Fixed-indexed annuities used to be known as equity indexed annuities. These types of annuities are a type of annuity that credits interest based on the changes in a market index, such as the S&P 500 or Dow Jones Industrial Average. When the index value increases, you are credited interest in the annuity.

However, the interest rate is guaranteed to never be less than zero, even if the market goes down. Thus, you can never lose your principal, and all previously credited earnings are protected from unforeseen downturns in the market.

Variable Annuity

Variable annuities describe contracts that provide variable returns instead of fixed returns. With these types of annuities, you can decide how much risk you want to take on for your investments. Typically, variable annuity contracts offer professionally managed portfolios called subaccounts, which function much like mutual funds. You can control whether your money goes into stocks, bonds, and money market instruments subaccounts.

In addition to being able to select the subaccounts where you would like to invest your premiums, many variable annuities also offer a fixed interest option. However, there are some cons of variable annuities. Variable annuities do not pay guaranteed fixed returns and their value comes from the performance of the investment subaccounts.

Because these subaccounts fluctuate depending on market conditions, the value of your annuity can decline causing you to lose money. On the other hand, variable annuities give you investment flexibility and tax deferral. The taxes on your interest, dividends, and gains will be deferred until you start making withdrawals.

When you decide, you can cash out your annuity in a lump sum or convert it to an income payment stream called annuitization. If you annuitize, you typically can choose either a fixed or variable payout. The earnings you receive will be subject to income taxes once you make withdrawals or start receiving income. Annuity withdrawals are taxed as ordinary income and they might be subject to surrender charges plus 10% federal income tax penalties if made before the age of 59 ½. Surrender charges can also apply during the contract’s surrender charge period.

Variable annuities also have contract limitations, fees and charges. These can include mortality and expense risk charges, sales and surrender charges, investment management fees, and charges for optional benefits. They are not guaranteed by the FDIC or any other government agency and any contractual guarantees are dependent on the financial strength of the issuing insurance company.

What Is the Best Type of Annuity?

Annuities are an excellent way to generate lifetime income or save for retirement while still managing risk. But these financial products are not simple. Deciding which one is best for you can be a challenge and is dependent on your unique financial situation.

Fixed annuities are safe and will pay you a fixed interest rate, or in the case of an immediate annuity, an income payment on a monthly, quarterly, semi-annual or annual basis. Variable annuities will rise and fall in value depending on how the investment subaccounts perform. Indexed annuities are tied to the performance of an index, such as the S&P 500 and they will credit you with interest based on the performance of that index, while also protecting your principal from any downside loss in value.

Choosing the correct annuity comes down to what you want to use the annuity for, the amount of risk you’re willing to accept, and understanding the specifics of the annuity so you can feel informed and confident with your decision.

Let AnnuityAdvantage Guide You to the Correct Annuity

Because annuities can be complex and are important life decisions that can greatly impact your retirement, it’s wise to consult a professional before making any decisions. For more than 25 years, AnnuityAdvantage has been guiding people who are planning for their retirement to the annuity that fits their needs best. If you think an annuity contract is something you want to explore further, contact us today. We can’t wait to help guide you to the annuity that most closely aligns with your retirement needs.

The post What Is the Difference Between Fixed, Fixed-Indexed, and Variable Annuities? appeared first on AnnuityAdvantage.

But before we dive into specifics, you might be wondering what annuities are. Technically, annuities are insurance contracts issued by insurance companies and offered through their contracted and licensed agents. Annuities can be purchased with either monthly premiums or lump sum payments and used either to accumulate funds on a tax-deferred basis or to pay out guaranteed income over a fixed period or for a lifetime. In this article, we delve into the different types of annuities and guide you through which ones can work best for your financial goals. We also compare annuities with some alternative financial strategies for retirement.

AnnuityAdvantage is here for all of your annuity needs. We guide you to the fixed-rate annuities (MYGA), fixed indexed annuities (FIA), and income annuities that make the most sense for your risk tolerance and individual needs. You should never worry about outliving your savings. Take care of your family while enjoying your golden years with AnnuityAdvantage.

What Are Annuities?

Annuities describe a category of financial products purchased from insurance companies. They can be funded either through a lump sum deposit or through a series of regular payments.  There are many types of annuities and all of them are designed to address different goals, such as growing your money on a tax advantaged basis, producing immediate income, or guaranteeing your future income. Unlike 401k(s) or non-annuity IRAs, annuities are the only financial instrument that can provide a fixed stream of income guaranteed for the rest of your life. This is why they can be an excellent consideration for part of your retirement planning strategy.

What Are the Benefits of Annuities?

There are many benefits to annuities. With fixed annuities, these benefits come from the annuity’s contractual guarantees and by providing security in the form of principal protection.

The following is a partial list of fixed annuity benefits:

• Interest rate flexibility, either guaranteed or adjusted annually, depending on your time horizon and needs.
• No stock market volatility exposure.
• The ability to help accumulate money (deferred annuities) or to distribute money in retirement (income annuities).
• Guaranteed income for life options.

What Are the Different Types of Annuities?

There are several different categories and types of annuities, and choosing which type works best for you depends on your own personal situation.

Deferred Annuities

Deferred annuities describes a category of annuities for those who don’t currently need income. There are many different types of annuities that fall under this category, including fixed-rate or multi-year guarantee annuities and fixed indexed annuities. These annuities grow your money tax-deferred until you need access to your funds. This category of annuity uses an accumulation phase (your money accumulates) and an annuitization phase (you begin receiving income). An interesting fact is that the majority of deferred annuities are never annuitized by their owners.

Immediate Annuities

For those who need immediate retirement income, immediate annuities are one of the best options. Immediate annuities give you flexible payout options and help provide peace of mind. This type of annuity benefits those who need monthly income to supplement their social security or pension.

Immediate annuities also benefit those who need additional income to help cover healthcare, utilities, and other retirement expenses. There is no accumulation phase with immediate annuities. You pay a lump sum and automatically enter the annuitization phase, with income payments beginning within one year of contract issue.

Fixed-Rate Annuities Vs. Fixed Index Annuities Vs. Variable Annuities

Deferred and immediate annuities can be issued as either fixed or variable contracts. The primary difference to keep in mind is that with a fixed annuity, your principal is guaranteed by the issuing insurance company, and with variable annuities, your principal is at risk and subject to potential market losses. Fixed annuities are the more secure type of annuity, offering strong contractual guarantees and insulation from market downturns.

Fixed index annuities (FIAs) deliver a healthy middle ground between fixed-rate annuities and variable annuities, providing a balanced approach to both risk aversion and growth potential.

Fixed-Rate Annuities

Fixed-rate annuities, also called multi-year guarantee annuities (MYGA), are the most straight-forward and easiest to understand of the annuity types. They feature set fixed interest rates that are guaranteed for specific periods of time. The guarantee period for these annuities is typically 2-10 years and the annuity grows at a steady, predictable rate, ensuring a guaranteed rate of return. 

Fixed Index Annuities

Fixed index annuities (FIAs) determine your annuity’s interest rate by measuring the performance of the stock market index(es) that it is aligned with, and then applying the percentage gain in that index as an interest credit. If the index decreases that year, you receive zero interest, but your principal is still protected and secure. Usually, the upside potential is limited in some way by a participation rate percentage or cap. When the market index your annuity is aligned with performs better, your annuity performs better. 

Variable Annuities

With variable annuities, you invest your annuity funds in certain investment options (typically mutual fund type sub-accounts) and the performance of these sub-accounts determine your earnings. Variable annuities do not guarantee your investment’s performance and they come with significant risks that investors should take into account. They can be attractive if the current fixed annuity rates are unfavorable and you’re willing to expose your principal to potential market losses. One common complaint of variable annuities is their high fees.

What Are the Alternatives to Annuities?

Planning for retirement requires the consideration of many financial options and choices. Of those options, fixed-rate annuities and fixed index annuities are among the safest options. They have reasonable upsides, tax-deferred growth, and guaranteed lifetime income options that can help you feel safer with your retirement investments.

You’ve likely heard of diversification when speaking about having a well-rounded retirement portfolio. The following are examples of the most common investment options that you can use to diversify your retirement portfolio.

Certificates of Deposits (CDs)

Certificates of Deposits (CDs) are sold by banks and they offer fixed interest rates for periods of time from which you can choose. These periods are typically six months to five years.  When analyzing annuities vs. CDs’ benefits, it’s important to recognize that CDs typically pay higher interest than savings accounts and they are insured by the FDIC. As with annuities, certificates of deposits have penalties for withdrawing your money before the end of their specified term. However, unlike tax-deferred annuities, CDs’ interest earned gets taxed each year, even if you don’t withdraw it. Their interest rates are also usually significantly lower than what you stand to earn from a fixed-rate annuity of the same duration.

Stock Mutual Funds

Stock mutual funds let you invest in a portfolio of stocks without taking on the risk of investing in just one stock individually. Investors typically pick a mutual fund family and then choose from various options in an attempt to maximize their investment growth. However, unlike fixed annuities, stock mutual funds expose your investment to potential market losses and do not have a minimum guaranteed interest rate. They can also charge both upfront and ongoing annual fees, whereas fixed annuities do not. 

Individual Stocks

Stocks can fit in a well-balanced retirement portfolio due to their high potential for growth. However, stocks require a substantial amount of research and analysis and include risks not associated with fixed annuities. Fixed annuities offer the benefit of securing your principal while stocks don’t. Like stock mutual funds, individual stocks also don’t offer any minimum interest rate guarantees.

Why Fixed Annuities Are a Safer Option than Variable Annuities

Fixed annuities offer a safer option for those looking for financial stability and an easier way to invest their money as part of their retirement portfolio. With their guaranteed interest rates, income options and principal protection, fixed annuities allow you to earn a reasonable return while protecting yourself from stock market fluctuations.

Fixed annuities also contain fewer stipulations than variable annuities and they are easier to understand. They are sensible products for anyone seeking assurance that their money will accrue interest over time without dealing with the potential ramifications of market volatility. They simplify income planning and ensure you understand the exact amount of payouts that are contractually guaranteed over the course of the annuity, allowing you to plan your future with more accuracy.

Conclusion – Are Annuities a Smart Choice?

Annuities can be an excellent choice for part of your retirement portfolio and they can help you create a solid income plan as you prepare for the future. As we have discussed, there are many different types of annuities so it is important to understand their distinctions when deciding which annuities are the right fit for your retirement plan.

For example, if you are comparing fixed-rate (MYGA), fixed-indexed, and variable annuities, it’s important to note that fixed-rate and fixed-index annuities offer more predictable growth opportunities while mitigating the risk associated with variable annuities. You should also consider whether you’re purchasing an annuity for its tax-deferral benefits or guaranteed income. If you need immediate retirement income, an immediate annuity is preferable. If you are looking for the tax deferral benefits annuities can provide, a deferred annuity is likely your best choice.

At AnnuityAdvantage, we guide you through the annuity buying process and help to ensure your chosen annuity is suitable and stands to bring you the best results over time. Contact us today to discover which annuities fit your situation best and start enjoying retirement the right way: with a clear path to future financial success.

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To take advantage of these financial products, you need to understand the key differences between different types of annuities. In this article, we’re examining the difference between an indexed annuity and a fixed-rate annuity. By learning more about the different types of annuities, you can be better prepared to choose the one that is right for you and your family.

Since 1999, AnnuityAdvantage has been a leading provider of fixed-rate, fixed-indexed and immediate income annuities. With a wide range of annuity products and friendly, experienced annuity agents, we can help you find the most suitable annuity product for your plans and financial goals. And, with our easy-to-use website, you can find and purchase your annuity from the comfort of your home.

What is an Annuity?

Before diving into the differences between indexed and fixed-rate annuities, let’s start with the basics. What exactly is an annuity? An annuity is an insurance contract that, depending on the type, can be used to grow your money, provide immediate income or guarantee future income. Annuities are offered by insurance companies, through licensed agents, and are regularly used as part of an ideal planning strategy for individuals nearing, or already in retirement. If you want a safe and secure retirement funding option that will protect your money over time, you should look into the various types of fixed annuities.

There are two primary phases for an annuity: the accumulation phase and the annuitization phase. The accumulation phase is the first step which covers the period of time when someone is actively funding their annuity. During this phase, the payouts have yet to begin and the annuitant pays either a lump sum premium deposit or a series of regular premium payments. As the money is put into the annuity, the annuity value grows on a tax-deferred basis over time. When the annuity progresses from the accumulation phase to the annuitization phase, the guaranteed income payments begin. It is important to note that a significant percentage of annuities are never annuitized and are simply used as an efficient tax-deferred accumulation vehicle.

How Does an Indexed Annuity Differ From a Fixed-Rate Annuity?

While these two annuity products may sound similar, they function quite differently. Knowing the difference between an indexed annuity and a fixed-rate annuity is an important early step when researching various annuity options. So, how exactly do these two types of annuities differ?

In many ways, it comes down to reasonable guaranteed rates versus potentially higher rates that are not guaranteed. A fixed-rate annuity provides you with a guaranteed interest rate on your initial premium deposit. An indexed annuity, on the other hand, offers the potential for higher interest rates that are determined by the performance of a specified market index, such as the Dow Jones Industrial Average or the S&P 500.

Let’s take a closer look at how each of these annuities work.

How Does a Fixed-Rate Annuity Work?

A fixed-rate annuity is generally seen as the simplest and most predictable option when it comes to annuities. A fixed-rate annuity provides you with a set interest rate on your money for a set period of time, typically between 2-10 years. This means that you can better forecast and plan out the annuity’s future value. If you’re looking for a principal guarantee and a guaranteed rate of interest, this could be the annuity product for you.

With a fixed-rate annuity, you know the guaranteed interest rate and the guarantee period before you even purchase the annuity. Based on the amount of money invested, the annuity provider will use the total protected premium deposit to calculate the income payment expected during the annuitization phase, assuming you elect that option or choose to retain the same policy to an advanced age. Some of the benefits of this type of annuity include a guaranteed interest rate, easier budgeting, simple contract provisions, choice of terms, and the ability to withdraw or move your money at the end of the initial guarantee period.

How Does an Indexed Annuity Work?

Compared to a fixed-rate annuity, indexed annuities offer the potential for higher interest rates, but less predictability. An indexed annuity offers a fluctuating interest rate based on the performance of an underlying market index, like the DJIA or S&P 500. Thus, if the market performs well, you stand to make even more money than with a fixed-rate annuity. If the market performs poorly, however, you will likely receive zero interest for that year, but your principal is guaranteed and always protected from any negative returns. This is why many people choose an indexed annuity versus simply speculating directly in the stock market, particularly when nearing retirement as principal preservation becomes even more important.

You need to be aware of the participation rates and the rate cap for your annuity when considering indexed annuities. The tradeoff for downside protection is that most indexed annuities limit your upside in some way.  With indexed annuities, you generally will not experience the full return of the underlying index used to calculate your interest credit. The participation rate determines what percentage of the index’s total return you will receive. Thus, if your participation rate is 60% and the index returns 10% for the year, you’ll receive a 6% interest credit on your annuity. With a rate cap, your maximum annual interest rate is capped at a certain percentage. Some of the benefits of an indexed annuity include the potential for higher interest rates, stability with downside protection, and principal protection.

What Should I Know Before Purchasing an Annuity?

Fixed annuities are a safe and reliable accumulation vehicle and income planning tool, but that doesn’t mean they’re ideal for every individual’s financial situation. In most cases, annuities are designed for those entering or preparing for their retirement years. Annuities can offer a steady stream of income that is both safe and consistent, which can help you better manage your funds throughout your golden years. When used for accumulation, annuities are also helpful at minimizing the devaluing risk of inflation.

However, while there are many benefits to this type of financial product, there are certain things to be aware of before purchasing an annuity. It’s important to note that the premium deposited into an annuity is illiquid, which means that, at least for a period of time, it cannot easily be withdrawn or surrendered for cash. Thus, if you anticipate needing large sums of cash in the immediate future, you’ll need to plan for this. Additionally, there can be surrender penalties if you’re trying to withdraw your money early from an annuity, and the IRS will impose a 10% tax penalty on interest earnings withdrawn prior to the age of 59 1/2. If you think you’ll need your money sooner rather than later, there may be better investment options to consider. For these reasons, annuities may not be as appropriate for younger people’s financial plans.

Like any financial decision, it’s critical to understand the exact stipulations of your annuity contract. For example, if the individual purchasing the annuity passes away before all the funds have been dispensed, what are the death benefit provisions? For example, most, but not all annuities will have a death benefit included in the policy that will disperse any remaining funds penalty free to a surviving family member named as a beneficiary. Understanding these details and specifications is crucial. By working with an experienced and trusted annuity provider, who can get you access to the best annuity rates, you’ll find the annuity that is right for you.

Conclusion – How Does an Indexed Annuity Differ From a Fixed-Rate Annuity?

Purchasing an annuity can be an ideal way to protect your money, to grow your nest egg or provide a reliable stream of income during your retirement years. However, before purchasing an annuity, you want to be sure you’re choosing the product that best aligns with your goals and financial plans for the future. Your annuity agent can help you assess the key differences between annuity products, but it’s always wise to educate yourself first.

Indexed annuities and fixed-rate annuities are two of the most popular types of annuities. A fixed-rate annuity provides a set rate of interest for a set period of time, which makes it easier to plan for the future. An indexed annuity credits interest based on the performance of the market index it is aligned with, which leaves it open to more interest rate uncertainty—but also with the potential for more reward. 

AnnuityAdvantage is one of the most trusted annuity providers in the country. Since 1999, we’ve been helping individuals find the right annuity products for their individual needs. Visit us online to review our selection of competitive annuity rates and quotes to find the right annuity product for your financial goals. Together, let’s ensure that your golden years are safe, secure, and truly golden.

The post How Does an Indexed Annuity Differ From a Fixed-Rate Annuity? appeared first on AnnuityAdvantage.

That’s the topic of discussion in a recently published story by Tim Grant of the Pittsburgh Post-Gazette. In the article, AnnuityAdvantage Founder and CEO, Ken Nuss, is quoted extensively. Here are a few snippets:

“...many financial advisers say it makes little sense to hold an annuity in a retirement account such as a traditional or Roth IRA because it would be similar to wearing a raincoat indoors. One of the main advantages of an annuity is that your money grows tax-deferred. However, any asset — stocks, bonds and annuities — that are held in an IRA is automatically tax-deferred.

“Is it a good idea to buy an annuity within an IRA? At first blush, the answer would seem to be ‘no’ because one of the biggest benefits of an annuity is tax deferral, which you already have in an IRA. But it’s not so simple,” said Ken Nuss, CEO of AnnuityAdvantage, a national marketplace for annuities based in Medford, Ore.

“If an annuity product meets a client’s needs in the best way, the fact that you are putting a tax-deferred product inside of an IRA that already provides tax deferral is irrelevant,” he said.

His example is a client who needs to supplement her income with a five-year fixed-rate investment. She could choose a corporate bond paying 2.5 percent, a bank CD paying 2 percent, or a fixed annuity yielding 3 percent.

“In that example, two of the options are not tax-deferred,” Mr. Nuss said. “But the tax-deferred fix annuity provides the best return for that particular client’s needs.”

In an age where company pensions are going by the wayside, Mr. Nuss said a fixed annuity can be a viable substitute for those people who have saved enough to purchase a meaningful retirement income stream.

“My main contradiction to the advice handed down by many financial advisers is you can’t lump all annuities into one category and say none of them should be placed in an IRA account,” Mr. Nuss said.”

If you’d like to read the entire article, just follow this link: https://www.post-gazette.com/business/money/2017/04/18/IRA-annuity-rates-retirement-contributions/stories/201704070197

The post Pittsburgh Post-Gazette – Placing an annuity in an IRA may not be, as some say, like wearing a raincoat indoors appeared first on AnnuityAdvantage.

“Annuities can serve to be an important leg in your retirement portfolio no matter what the current interest rates are. It is difficult to determine the perfect time to invest in an annuity, but with a projected hike in rates, it might be a good time to weigh the option.

Ken Nuss, CEO of AnnuityAdvantage, discussed with FOX Business what you need to know about rising interest rates’ impact on annuities, and how to create a guaranteed lifetime income stream.

Boomer: How do higher interest rates impact the value of annuities?

Nuss: The value of an existing, already issued fixed-rate annuity is not impacted when interest rates rise. The annuity value is determined by the initial deposit premium and accumulated interest earnings not yet withdrawn, compounding at a pre-determined interest rate for a set period of time, typically 3-10 years; all of which is contractually guaranteed by the issuing insurance company.

Boomer: Given the current interest rate environment and outlook, would this be the right time to buy one?

Nuss: This is a question we hear often. In fact, it is a question we have heard often for nearly a decade. The problem with waiting for interest rates to rise is that no one knows for sure when rising rates will occur, how high they will go, and if those higher rates will be sustained or if they will fall back down.

Meanwhile, there are countless numbers of investors sitting on the sidelines, waiting for higher interest rates to develop, with their money parked in extremely low interest bearing savings and money market accounts, and they have been doing this for years.

For those individuals that still feel uncomfortable locking in today’s interest rates, we recommend a strategy of half now and half later. Take the funds that are being considered for fixed-rate annuities and commit half those funds now at today’s rates, holding the other half back in hopes of higher rates in the near future.

Boomer: Can you discuss some of the pros and cons of fixed indexed?

Nuss: Fixed indexed annuities are...”

To continue reading the full article, simply follow this link: https://www.foxbusiness.com/features/what-rising-interest-rates-mean-for-annuities

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