Annunity Products

What is a Deferred Annuity?

A deferred annuity pays you an income but starts the payments at some point in the future. The insurance company gives you several options on how to grow the money, (fixed annuity, indexed annuity or variable annuity) in order to increase the payments. A tax deferred annuity allows income tax to be deferred until the money is withdrawn which allows your money to grow more quickly than a CD, for example, since with a CD you have to pay taxes on your gains every year.

What is an Immediate Annuity?

An immediate annuity is an investment policy. Immediate annuities are sometimes known as Single Premium Immediate Annuities. Immediate annuities are commonly purchased with a lump sum and used as a retirement investment. In an immediate annuity, the investor begins to receive lump sum pay-outs anywhere from immediately to one year from the date of purchase. Generally, payments begin one month after investing in the annuity.

Immediate annuities can be fixed or variable. While a fixed immediate annuity payment depends on the amount you contributed, your age, as well as the interest rate at the time or purchase; a variable immediate annuity depends on the type of investment purchased.

There are a variety of different options available to you when purchasing an immediate annuity. You can decide whether you would like a set period of payments or a lifetime of payments. You can also decide on whether the payments are solely for the person who holds the policy or also for a secondary person, such as a spouse.

What are the Advantages of Annuities?

There are three principal advantages to an annuity:

  1. Tax-deferred accumulation. This allows you to set aside the funds that you pay into the annuity for as long as you want, without worrying about exceeding federal tax limits.
  2. Flexibility. An annuity can offer you a variable or a fixed return, unencumbered by federal tax limitations.
  3. Security. An annuity offers a fixed-income payout option that would grant an income that cannot be outlived.

How Will I Receive my Annuity Payments?

There are several pay-out methods available when you begin receiving annuity payments. With some options, you or your beneficiaries can select how you want to be paid. The following are some of these:

You can get income for your entire lifetime even when the money in your annuity account has been used up. This is advantageous if you live to an advanced age because it will maximize the income that you will receive. However, there is a risk involved: when you die, all the money cannot be claimed, even by your assigned beneficiaries. If you die young, you simply lose this money.

Another is the joint and survivor annuity where it pays you during your lifetime, and after your death your beneficiary (usually your spouse) will also be paid during his or her lifetime.

You can also refund your annuity, meaning you're gaining income for life. However, when you die, the portion if the income payments that you have not collected will be the only amount that your beneficiary receives.

An equity indexed annuity is a type of tax-deferred annuity whose credited interest is linked to an equity index - typically the S&P 500. It guarantees a minimum interest rate (typically between 1% and 3%) if held to the end of the surrender term and protects against a loss of principal and any previously gained interest. An equity indexed annuity is a contract with an insurance or annuity company. The returns may be higher than fixed investments such as CDs, money market accounts, and bonds but not as high as market returns.

The contracts may be suitable for a portion of the asset portfolio for those who want to avoid risk and are in retirement or nearing retirement age. The objective of purchasing an equity index annuity is to realize greater gains than those provided by CDs, money markets or bonds, while still protecting principal. Indexed annuities represent about 30% of all fixed annuity sales in 2006 according to the Advantage Group (see www.indexannuity.org)


A Different Way to Credit Interest

The indexed annuity is virtually identical to a fixed annuity except in the way interest in calculated. As an example consider a $100,000 fixed annuity that credits a 4% annual effect interest rate. The owner then receives an interest credit of $4000. However, in an equity indexed annuity the interest credit is linked to the equity markets. For example assume the index is the S&P 500 and a one year point-to-point method is used and that the annuity offers a 8% cap. The $100,000 annuity could credit anything between 0% and 8% based on the change in the S&P 500. The cap, 8% in this example, is determined by how much is afforded by budget which is usually at or near the 4% fixed rate. If fixed rates increase then it would be expected that the cap would increase as well.

This allows the owner the security of knowing that the $100,000 is safe but rather than receiving the sure 4% they can receive up to 8%. Historically since 1950, an 8% cap on the S&P 500 has resulted in an average interest credit of 5.2%, very similar to what is considered the "risk free rate of return" delivered by T-bills, 5.1% over a similar period. The return may also be adjusted by other factors such as the participation rate and market value adjustments to cover bring the cost of the option into the budget available.

This means the owner of the indexed annuity now has assumed more risk than a fixed annuity but less than being in the equity markets themselves. The result is that the expected yield (risk adjusted) for an indexed annuity is higher than a fixed annuity, CD, etc. However, the expected yield of being in the market is higher for several reasons.

The premium (in our example the $100,000) is at risk of loss when owning the index outright. It should be noted that Equity Index Annuity does not participate in dividends as owning the index outright would and similar there are no ongoing transaction expenses or fees. Interest is compounded as frequently as when interest is credited and this is almost always annually but contracts are available that credit interest over a 5 year term.

The taxation of the gains in an indexed annuity is identical to that of fixed annuities. Taxes are deferred until monies are received and then interest is withdrawn first and taxed as ordinary income.

UNBIASED: Like many brokers and associations, Kansas Life does not represent just one carrier or push a pre-chosen policy. We represent several A-rated carriers - the very best in the business. And we offer all types of policies currently available.

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