Questions about annuities are common from clients, friends, and associates who know I am a life and health insurance agent. This is understandable because the term can have more than one meaning. However this article is meant to be a primer on that type of annuity which is a combination of an investment and an insurance product. Annuities may be purchased from licensed insurance agents and are often promoted by those agents, agencies, insurance companies, or banks.

Of course, you should consult your own financial professional and possibly a tax professional to make sure that the comments in this primer apply to your own particular situation! I am not a tax professional, and laws concerning annuity investments change frequently!

In fact, annuity contracts are sold by insurance companies. Insurance agents or bank employees are appointed to represent those companies. Generally, unlike life insurance, the death benefit of an annuity contract is usually just the value of the cash inside the annuity: i.e. payments + Interest - withdrawels - charges. Life insurance may or may not also have a cash value, but the death benefit usually exceeds that value by a lot. Of course, different kinds of life insurance would be the topic for another article.

Immediate Annuity 

An immediate annuity is the type of contract that generates lots of buzz amoung retirees, or those with a sizable amount of cash they’d like to sock away to make payments for future income. These types of annuity contracts can pay out for a specified number of years, until the money runs out, or even be set up to guarantee lifetime payments. It’s sort of like a loan that a purchaser makes to the insurance company. Then the insurance company pays back the loan with pre-determined interest rates or rates fixed to some index like the S&P or Dow Jones.

Deferred Annuity 

A deferred annuity is more like a vehicle to accumulate savings, usually for retirement. These can be purchased with a fixed interest rate, a variable interest rate, or one tied to an index. Hence they are called fixed, variable, or equity indexed annuities.

Usually a smaller initial payment is made, and then a series of payments will be made over the span of years to accumulate cash value. The interest on these payments grows tax deferred.

Within the types of deferred annuities, we also have tax qualified and non-tax qualified annuities. Tax qualified annuities work like a 401K where you are allowed to take the amount of the payment off of your income for tax reasons (within IRS limits). Non-tax qualfied annuities mean that you have already paid the taxes on the money. Both types of annuities have advantages. With the tax qualified type, you have an immediate savings on your IRS bill, but with the non-tax qualified type, you don’t have to worry about a big tax bill when you are older.

Other Points about Annuities

Some annuities have a load fee, but many do not. If your are considering the purchase of an annuity, this would be a good thing to check out. Most annuitiy purchasers that I have met do not want to see their cash value decreased on the first day of their investment!

Many annuities guarantee a minimum interest, even if they are variable or equity indexed. This feature can make a very safe investment. Make sure you ask about this.

Make sure the insurance company is highly rated. The safety of your investment depends upon two things: the quality of the insurance company and your state rules for protecting your investment if the insurance company should have financial problems.

Watch surrender charges. Annuities may pay out very well, but they often expect a long term contract. If you choose to break that contract by pulling your money out early, you may be faced with stiff surrender charges. These charges usually decline over a period of years.

Some newer annuities come ‘packaged’ with long term care insurance. These are called long term care annuities, and may allow you to use a portion of the annuity to actually purchase long term care insurance. Almost all annuities will have a feature to waive any surrender charges if you need the money because of illness or long term care.

 Again this article is intended to be a simple primer about different types of annuity investments. I plan on writing more about pros and cons in the future, but for now I am just defining some of the language.

You may reprint this article for free as long as you leave in the links back to the original post. This article came from 24/7 Quote US - Insurance BLOG.  

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