Annuities

What You Should Know About Annuities

For people who are planning on securing their finances for their retirement, the question “what is an annuity” may come to mind, at certain points in their life. After all, so much has been said about this product, yet not everyone is familiar with how this works or the benefit it offers.

What are Annuities?

One simplified annuity definition is this – it is a type of insurance product ideal for an investor or the average person who looks for a solid source of income during retirement. So, as you invest in your annuity, you can expect to receive payments for a specific length of time or even for as long as you live. For retired individuals, this is a comforting idea since their finances are already properly managed and secured.

As for the question on the amount of money you can get every payout, this depends on certain factors. For instance, you have to take into account the duration of your payment period. There is a formula used for calculating the payment on annuities, which is generally done periodically.

It is also worth noting that the annuity rate per period, as well as the number of periods, must show the duration of payment made. So, if you are making monthly payments, the formula should use the monthly rate. This way, an accurate value is obtained after making calculations using the annuity formula.

Types of Annuities

The following are among the different types of annuities, including the features of each.

1. Single Premium Immediate Annuity

Most definition of Fixed Annuities would include the definition of the Single Premium Immediate Annuity because all annuities were originally created to at some point provide a stream of income to the insured.  And while the stream of income portion holds true today for an Immediate Annuity or Deferred Income Annuity, it is best to use the original descriptions for one of these two and not the Fixed or Fixed Index Annuity.

An Immediate Annuity is purchased with a Single Premium to provide an income stream beginning within the first 12 months for one of the following payouts:

Single Life Payment Options

  • Period Certain: it provides a stream of income for a specific time frame usually 5 – 20 years and does not include a lifetime benefit.
  • Lifetime Only: it provides a stream of income for the insured’s lifetime based solely on the person’s life expectancy.  The downside of this payout is if the insured passes away prior to the funds being returned via lifetime payments, the insurance company keeps the remaining funds.
  • Lifetime with Period Certain: it provides a stream of income for the insured’s lifetime based on their life expectancy with a Period Certain (typically 5 – 20 years).  If the Period Certain is longer than the life expectancy, it will lower the lifetime payout; and on the contrary if the Period Certain is shorter than the life expectancy, it may increase the lifetime payout.  If the insured dies prior to the full term of the Period Certain, this may mean the insurance company keeps the remaining funds.
  • Lifetime with Cash Refund: it provides a stream of income for the insured’s lifetime based solely on the person’s life expectancy.  If the initial premium has not been paid out via installment payments, the remaining amount is refunded to the beneficiary(s).
  • Lifetime with Installment Refund: it provides a stream of income for the insured’s lifetime based solely on the person’s life expectancy.  If the initial premium has not been paid out via installment payments, the payments will continue to the beneficiary(s) until the initial premium has been paid out.

Joint Life Payment Options

  • Same options as Single Life Payouts

2. Deferred Income Annuity

The payout options are the same as a Single Premium Immediate Annuity except the payments are deferred for at least 13 months.  Some insurance companies require the start date of the first payment be selected at the point of purchase, while others allow the start to be flexible.

3. Fixed Annuity

As the name implies, a Fixed Annuity offers a “fixed” rate.  Under the name of a Fixed Annuity there are two specific ways the fixed or declared rate are delivered.

The most popular way is the interest rate is guaranteed every year of the term selected.  When the rate is guaranteed, it is called a Multi-Year Guaranteed Annuity or MYGA.  The term typically ranges from 3 – 10 years.  Often times, the longer the term, the higher the rate.  With a MYGA, the client can feel the comfort of knowing exactly what they make every year.

The traditional way for many years was a Traditional Fixed Annuity. The rate would often be guaranteed for one year and would most often include a bonus for the first year.  After year one, a new rate is declared each year thereafter.  The contract is required to include a minimum rate the carrier can offer, typically between 1 – 3%.  During lower rate environments, the minimum would typically be 1% with higher rate environments possibly offering a minimum guarantee of up to 3%.  The Traditional Fixed Annuity may or may not renew at the base rate, but cannot go any lower than the minimum guaranteed rate included in the contract at the time of purchase.

An advantage of a Fixed Annuity is having dependable performance for stability in your retirement funds.  In addition, it may offer a specified amount of liquidity during the surrender charge period via penalty free withdrawals and waivers.  The Fixed Annuity gives tremendous strength by providing the peace of mind that you cannot lose your funds in the market.

4. Fixed Index Annuity

The Fixed Index Annuity or “Equity” Index Annuity is very similar to a Fixed Annuity in regards to safety and allows you to participate in the upside of the market while protecting your funds from any market loss.  The product was originally named Equity Index Annuity, but because there is no equity exposure, most insurance companies now call them a Fixed Index Annuity.

This annuity guarantees you will never receive a negative return, while allowing you to participate in the “Upside of the Market” without participating in the “Downside of the Market”.  The most popular Index/Indices used is the S&P 500.  We are now seeing several other Indexes being used, but the principals are all very similar.  The upside participation you receive may involve a cap, spread, and/or participation rate.  While the most popular strategies credit interest on a 1 Year Point to Point basis, more and more insurance companies are using 2 Year, 5 Year and even 10 Year Point to Point strategies.

Benefits You Can Expect from Annuities

Annuities come with a number of benefits whether the account holder is a retired individual or someone in his or her 30s. There is no such thing as a yearly contribution limit involved with non-qualified annuities, and you can put away a higher amount of money for your retirement funds. What’s more, the money invested is compounded annually while being tax-deferred.

If you already have a pension plan or social security, an annuity can complement these sources of your retirement income. You have the option to receive set payments as long as you live or take out a lump-sum of cash from your account. Either way, you have the security of having a dependable income stream to cover your expenses during retirement, which can certainly make your life much easier.

Pacific Insurance Group aims to provide potential clients with the best professional advice in determining the right annuity product and coverage suitable to their particular situation. With our broad knowledge base and years of experience in this field, clients can expect to receive the highest level of service they deserve. Give us a call today and find out more about our products and services to cover all your needs.