Before we delve too deep in the strategies ALLCHOICE can help today’s Baby Boomer and Senior Market with, you first need to understand the underlying product…The Annuity!
Annuities are insurance contracts designed to provide an individual with income for an established period of time. Whereas Life Insurance is needed in the event you do not live long enough…Annuities are needed to insure that you don’t live too long. A key aspect of an annuity, as opposed to other money vehicles (CD’s, Stock Market, Money Market, etc.) is the fact that Annuities grow Tax-Deferred. In addition to the Tax-Deferred Growth, Annuities also pass to your heirs without passing through Probate.
TYPES OF ANNUITIES
There are basically three common Annuity types: Fixed Annuity, Variable Annuity, and Fixed-Indexed Annuity.
Fixed Annuities are Insurance Contracts that specify a Fixed Interest Rate of Return (typically reset each year). There are Minimum Contract Guarantees that contract must earn each year.
Variable Annuities are Insurance Contracts that are funded using securities, stocks, and unsecured bonds, which tend to fluctuate with economic conditions. The value of the annuity depends on the value of the underlying securities. Variable Annuity contracts can offer greater returns than a Fixed Annuity, however the Annuity Owner can also LOSE money.
Fixed-Indexed Annuities are a hybrid between the Fixed and Variable Annuity. With a Fixed-Indexed Annuity, the Annuity Owner is guaranteed to never lose his/her principle. The returns of the Fixed-Indexed Annuity are tied to a Securities Index (the most common is the S&P 500). The Insurance Company sets the formula(s) for how your returns are calculated. The Fixed-Indexed Annuity can provide greater returns than the Fixed Annuity, or you could have 0% (never a negative return) depending on market conditions.
ISSUES WITH ANNUITIES
Much has been made over recent years about Annuities. There have been many stories about Seniors being sold an Annuity that my unscrupulous agents. At ALLCHOICE we believe in the merits of Annuities, however, an Annuity is not for everyone. The biggest concern with annuities have tended to revolve around the “Surrender Charges”. So, lets take a look at Surrender Charges.
Surrender Charges are charges the Insurance Company imposes on the annuity owner in the event that he/she surrenders the contract before the contract period is over. Why do Insurance Companies have surrender charges. In order for the Insurance Company to provide the contract owner with the many benefits an annuity contract offers, they must price their contracts (internal fees, expenses, and investment returns) using a certain amount of time. If the contract is ended before the contract terms ends, the insurance company may lose money. Insurance Companies understand that contract owners may need to access portions of their annuity proceeds from time to time, that is why most companies offer contract owners annual free withdrawals (typically 10% of the contract value).
Before considering the purchase of an annuity contract, please reference the North Carolina Department of Insurance’s Consumer Guide to Annuities.