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Archive for the ‘Annuities’ Category

Before you finalize an annuity contract you need to understand annuity riders and whether in your unique situation a death benefit rider, living benefit rider or increased payment option makes sense.

Death Benefit Rider for Annuities Explained

Some annuities include a rider that acts like a life insurance benefit. Please note that annuity death benefits to heirs have a different tax status than life insurance benefits which pass to beneficiaries’ tax free. If you die before you collect the full value of the annuity, the rider pays your heirs the amount you invested plus interest or the market value of the funds minus whatever you have collected in payouts.

While the goal of an annuity is often to supplement retirement income most deferred annuities include a death benefit option. Typically, a death benefit payout is determined by your account balance when you die. You can protect your heirs from declines in the market by purchasing an enhanced death benefit rider, which locks in the account balance periodically.

Some immediate annuities don’t continue payments to a beneficiary after your death. These annuities provide you with higher payouts while you are still alive.

Living Benefit Rider for Annuities Explained

Living benefit riders are optional and you must request them at the time you purchase your variable annuity. It is unusual for a company to allow you to add a living benefit rider after the annuity contract has been issued. These relatively new options decrease the risk to the variable annuity owner by providing payout guarantees or floors for the risk averse in exchange for a fee.

A living benefit option will cost you a fee but will provide a guarantee to protect your variable annuity investment from market declines and provide a guaranteed minimum payout. There are many types of living benefit riders and you should review these with a trusted financial advisor before determining which if any are appropriate in your situation. Three typical choices are:

Increased Payout Option for Annuities Explained

Increased payout or escalating options allow you to purchase an annuity with a payout that will increase either in line with inflation each year or by a fixed percentage each year.

A level annuity payout is the same amount for as long as you live. If you are concerned about inflation an escalating annuity could provide an answer to your worries. With an increased payout option your payouts start off lower, but steadily increase over time. The downside to an increased payout option is that it may take several years for your payout under an escalating annuity to reach a level equivalent to the initial payout on a level annuity payout. You need to carefully consider if this option makes sense in your situation. It may not make sense for older individuals.

Standing at the threshold of your retirement and wondering what is the best investment option for you? If you are near your retirement you have probably heard about the different options such as 401k retirement plans, traditional and Roth IRA’s and more. Once you have decided on your retirement plan satisfactorily, the time to decide where and how you will invest your money arrives.

The options for this are also numerous and are inclusive of bonds, stocks, buying a franchise, real estate, a small business and finally annuities. Annuities are invested by many people during their retirement and can prove to be a good investment or a bad one depending upon your financial standing and how professionally active you would like to spend your retirement years.

There are several types of annuities offered by companies and banks today. Choosing which one to invest in is dependant on your specific needs and requirements and also on your financial standing. If you feel you do not at present have enough funds collected to start your own small business, invest in real estate, buy a franchise and so forth, an annuity might be a good investment for you. Furthermore, if you wish to have most of your finances handled by experts in the business, investing in an annuity is a good idea.

Types of annuities include equity indexed annuities, variable annuities and lifetime income annuities. An annuity is basically a contract signed between you and an insurance company. The contract with its terms is drawn and agreed upon to provide you with a steady income during your years of retirement. How much you get and when you get the money depends on which annuity agreement you decide on for yourself.

You could either pay the company a large amount in the beginning of the contract follow up or you could make the payment in easy installments on a monthly basis. Once the payments have been made, you will receive a certain amount of money from the insurance company each month ensuring a steady and stable source of monetary funds during your non-working years.

Many experts openly discourage people from investing their savings in annuities but really it depends on your specific needs and preferences. If you feel your funds are not a handsome enough to allow you to invest in one area and feel safe about it, annuities are often the best option. Furthermore, if you do not want to spend your retirement years talking to financial advisors and experts about finances and are more inclined towards a conservative, quiet retirement plan, annuities are the investment option for you.

There are certain drawbacks to investing your savings in annuities and if you are thinking of annuities you should be well aware of these and be prepared to tolerate them as well. It is often seen to be a long term investment with high fees when compared to other investments such as bonds and stocks and does not always return well.

Many investors have little understanding of annuities or variable annuities but I hope to change that today. I’m not offering investment advice or recommendations rather my goal is to educate you on the pros and cons of variable annuities so you can make a more informed decision.

Annuities are meant to be long term investments so if you need to access the money in a few years they are probably not for you. There are many companies that offer variable annuities and they all have different features. Some offer guaranteed future income and others guarantee the initial investment. You must read the prospectus to fully understand what each annuity provides or consult a financial advisor.

I like to think positively so let’s start with the pros of variable annuities. Remember each company may offer slightly different features but you can expect most of these will be included.

Pros

Death benefit can ensure your family receives a portion of the account balance Ability to guarantee income until you die, also called annuitizing Deferred taxes until withdraws are made No contribution limits like 401ks or IRAs Take a loan against the value of the annuity for a fee Investments may increase over time outpacing the rate of inflation
Cons

Commissions on variable annuities can be 4 percent to 8 percent Administrative and insurance fees average 2.2 percent of the assets each year Gains taxed as regular income not as capital gains which have a lower rate Surrender fees can be significant if you close the account within 7 years If you withdraw prior to age 59