The individual annuity – A Resource for Your Retirment
Fewer workers are covered by traditional employer provided pension plans that provide a lifetime benefit. Furthermore, Social Security may not provide future retirees the level of benefits that it provides today. Americans need other ways to create and guarantee lifetime income so that their standard of living doesn’t decline with age.
To achieve a secure retirement, more and more retirees are including an individual annuity in their plans. An annuity can provide a steady stream of income for life, shifting the burden of managing savings from you to your life insurance company.
An annuity is the only individual financial product that offers a guarantee of lifetime income. This guide explains how individual annuities work and how an annuity might enhance your retirement security.
Many deferred annuities allow you to withdraw money during the accumulation phase without triggering a charge. There generally is a limit on the amount you may withdraw each year
Index Annuity
An index annuity is a type of fixed annuity. With an index annuity, earnings accumulate at a rate based on a formula linked to one or more equity-based indexes, such as the Standard & Poor’s 500 Composite Stock Price Index™ (S&P 500), which tracks the performance of the 500 largest publicly traded securities. The principal and credited interest of an index annuity are guaranteed not to lose value due to index losses (subject to surrender charges). Index annuities may offer death benefit protection.
Variable Annuity
The money you place in a variable annuity is put in subaccounts that are invested in stock and bond funds. You can respond to market conditions by moving your money from one subaccount to another—without incurring current taxes. The return on your investments is subject to the risk of market fluctuation. Your total account value depends on how much risk you take, the performance of the subaccounts, and what charges and fees are deducted. These factors are explained in the annuity’s prospectus, which outlines the objectives and level of risk for each subaccount, operating expenses, and financial statements.
Over the long term, variable annuities may serve as an effective hedge against inflation. However, it is possible to lose money in a variable annuity. Some variable annuities allow you to place some money in a fixed account with a guaranteed rate of return. Such diversification helps spread your risk. There are also optional guarantees that can be purchased to provide additional protection against downturns in the market. Like a fixed annuity, if you die before payments begin, your beneficiary may receive a death benefit, which is typically the greater of either the current account value of the annuity less withdrawals, or the amount of your initial contribution.
Costs and Fees
All financial products have costs associated with them, and annuities are no different. An annuity is an insurance contract that is unique in its ability to guarantee a steady stream of income for life. This and other insurance features, such as death benefits, are included in the cost of the annuity.
In addition to the costs for insurance features, fees may be charged if you withdraw some or all of your money from your deferred annuity in the early years. These fees are commonly referred to as withdrawal or surrender charges. Often, after a time specified in the contract, these fees are eliminated. Some annuities waive these charges under specific circumstances such as death, confinement to a nursing home, or terminal illness. As mentioned in the previous section, some deferred annuities may allow annual withdrawals of a certain amount without triggering a surrender charge. Other fees also may apply, such as a transaction fee, market value adjustment, contract fees, and in the case of a variable annuity, portfolio management. Ask your agent or life insurance company for a description of all applicable charges and fees.
For additional questions about annuities contact A.C. Thomas & Associates at (904) 730-3900