Annuities
Guaranteed Annuity Accounts
An annuity is a financial agreement between a consumer and an insurance company. When purchasing an annuity, you are investing your money with an insurance company for a later date. In turn, that company guarantees interest on your money while they hold it. Investors have many options when it comes to annuity investing.
Annuities have become very popular in the investment world for a variety of reasons. To begin with, these investments can avoid probate by using a beneficiary designation for payout. For example, you can name your spouse, your children or a favorite charity as the beneficiary of the account at your passing.
Safe Annuity Investing and Tax Deferral
Annuities are usually very safe vehicles for investing. They are backed by the full faith of the insurance company with whom you choose to invest. It is important for you and your agent to pick an established, well-rated company. There are many independent groups which rate the overall strength of insurance companies. AM Best, Moody’s, Standard and Poor’s are a few of the more prominent companies providing these services nationwide.
Annuities can have significant tax advantages over other investments. Alternatively, C.D.’s and many other income generating accounts are taxable whether or not the interest is withdrawn. If you reinvest the interest back into your annuity principal, you owe no taxes. This way you can defer taxes for your lifetime in a non-qualified annuity. * Thus, your interest compounds for many years and your nest egg can grow larger for later use. Albert Einstein said compounding interest was one of the great inventions of the world. Einstein understood that this simple, powerful concept was an important key to wealth accumulation.
A qualified annuity requires a mandatory distribution at age 70 and 1/2. (You should always consult your accountant for tax advice.)
Investment Flexibility
Annuity accounts are very flexible. Their maturity terms can range from as little as 1 year to 10 years or longer. Generally, an account with a longer maturity will have a higher interest payment. In addition, many insurance companies are offering 1st year premium bonuses between 5-10% if you meet certain criteria.
Most new annuities allow you to add money throughout the duration of the contract without re-starting the surrender period. Many contracts allow for systematic interest withdraws on a monthly, quarterly, bi-annual or annual basis without penalty. Unlike C.D.’s, these accounts also offer you access to a portion of your principal during the maturity period, usually up to 10% of the account value if needed.
At or before maturity, you have the option of withdrawing your money systematically like you would a pension or Social Security payment for income purposes. (This is called an annuitization - see the immediate annuity section for more details.) However, most Ohio consumers withdraw their annuities in a lump sum payment just as they would when cashing in a certificate of deposit. Others transfer their older account for new ones in what is called a “1035 tax free exchange.” This type of exchange allows any tax deferred interest in an older contract to be transferred tax free into a new contract.
Annuity Myths
There are two common myths concerning these investments. The first is that consumers have little access to their annuity money during their maturity term. The second is that the insurance company keeps your money at your passing. These myths are simply not true. The facts are these: unless you choose to annuitize your contract, you have access to your funds just like you would a C.D. and your beneficiaries receive your account value at your passing.
These investment accounts are all around you. Many state retirement plans like Ohio Public Employee Retirement System and State Teachers Retirement System use these accounts for their employees. In fact, every year billions of dollars from individuals and employers alike flow into these investment vehicles for many of the above-mentioned reasons.
Annuities and You
The bottom line is that investing is for the long haul. You would not want to put money into an annuity that you were planning on using next year to purchase a new car or home. Annuities are much more appropriate for your longer term use like 401-k rollovers, I.R.A.’s, certificates of deposit, saving accounts and brokerage accounts.
