Selecting An Annuity

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Choosing The Right Annuity: Things To Know

• Understand that an annuity is a contract between you and your insurance company under which you pay the insurer a sum of money, either in one payment or a series of payments. In return, you receive periodic payments that begin immediately or at a future date.



• Consider that an important benefit of an annuity is tax deferral. You do not pay federal income taxes on the annuity's earnings until you withdraw money. At that point, the growth in funds you receive is taxed as ordinary income.



• Your contributions may be made with either pretax or after-tax dollars, depending upon your situation and the terms of your contract.



• Choose a beneficiary. If you die before your payout period begins or at some point during your payout period, your beneficiary may receive a death benefit. The benefit may be the remaining money in your account or a preset minimum. Generally this benefit is paid to the beneficiary you specify, without the potential cost, delay and publicity of probate. This can provide peace of mind to the annuity owner.



• Variable annuities offer a range of options and the ultimate value of your variable annuity will depend on the performance of the options selected. The investment options typically are mutual fund-like "sub-accounts" which may include stocks, bonds, money market instruments or a combination of the three. For this reason, variable annuities are considered securities and are regulated by the Securities and Exchange Commission (SEC).



• Remember that a fixed annuity guarantees future payments and can be a good conservative option. Fixed annuities generally are not considered securities and are not regulated by the SEC.



• An equity-indexed annuity is a fixed annuity that offers a guaranteed minimum interest rate linked to an index such as the S&P 500. If the index moves upward, the interest rate generally increases by some amount. If it moves downward, no less than the guaranteed interest rate is paid.



• When considering a variable annuity, keep in mind the fees, expenses and penalties that may affect the value of your annuity. Understand that you may incur mortality and expense-risk charges, as well as administrative fees. Any fees and expenses will be listed in the annuity contract, or in the case of a variable annuity the fees and expenses can also be found in the prospectus.



• In addition, be cautious that if you take money from your annuity prior to age 59½, you may incur a 10 percent IRS penalty in addition to any taxes for which you may be liable. Exception: All withdrawal and IRS penalties may be waived if a life based annuitization is selected.



• Since the contract is backed by the financial strength of the insurance company, be sure to review the financial ratings of the insurer.

Other Considerations

• Costs may include annual fees, investment management fees, insurance expenses and other charges. Extra features, such as long-term care riders and liquidity options, typically have costs associated with them.



• Some annuities offer death benefit protection or the option of continuing payments to a beneficiary after your death. This may help your loved ones avoid the time and cost of probate for these funds.



• Because annuity earnings are taxed for federal income tax purposes only when you withdraw funds or receive payouts, you may pay less federal income taxes.



• Fees are generally charged on partial withdrawals or surrenders from an annuity for some number of years before annuity payments have begun.
  
  
  • These fees, called surrender charges, are usually a percentage of the amount withdrawn.
  
  
  
  • Some deferred annuities offer a "free withdrawal" privilege that lets you take out a defined amount without a surrender fee.
  
  
  
  • Surrender fees may also be waived if you annuitize, converting your deferred contract into an income stream.
  
  
  
• An option for income annuities is life income with a guaranteed return of premium. Under this option, payments continue as long as you live. If something were to happen to you, payments are guaranteed to continue until all money — everything you put in — has been paid back to you or to your beneficiaries. This is referred to as a "guaranteed return of premium."

With your financial goals in mind, you should begin any annuity selection process by asking the questions on the Questions To Ask About Annuities checklist. After you have answered them, your financial planning professional can help you make additional decisions regarding the best annuity for your needs.