Let’s face it, sometimes annuities get a bad rap in the investment world and perhaps some of that is deserved. In fairness, those who are talking down these accounts are usually trying to sell some other financial product.
However, the bottom line is investors are usually and understandably concerned about access to their deposited funds. Safe investments need to provide suitable liquidity for living needs, emergencies, and required minimum distributions.
Annuity Surrender Charges
Almost all deferred annuities carry some type of early surrender penalty during the chosen investment term. The penalty is usually a percentage of the invested amount that decreases each year until the end of the chosen annuity term.
Most deferred annuity accounts carry a term that is between 1 and 10 years. Should you withdraw all of your funds before your chosen term is up, then you will incur a surrender penalty. Early surrender percentage amounts will vary from company to company and will always be included in your application and contract material.
Annuity Liquidity and Interest Withdraws
This usually brings up the question of liquidity. In what way(s) can an owner withdraw funds before the annuity has matured without incurring a surrender charge? Almost all annuities allow for the following types of penalty free withdraws:
- Monthly Interest
- Yearly percentage of the principal
- Required minimum distributions
- Long term care expenses
- Diagnosed terminal illness
- Return of invested premium
Monthly Interest Withdraws
In reality, there are several ways to withdraw money from your annuity account without penalty. Many consumers use their annuity account to generate needed income on a systematic basis.
Most fixed interest annuity accounts allow for earned interest withdraws monthly, quarterly, semi-annually, yearly or as needed. Monthly interest can be taken after the first month and in the first year of the contract. However, in almost all cases, the owner of the account must be over age 59 1/2 to withdraw interest only.
Access to Your Annuity Principal
Additionally, many annuity policies allow the owner to withdraw a percentage of the principal each year. Most contracts allow for a minimum 10% principal withdraw each year – although some only allow this feature in year two and beyond.
In some cases, if the 10% is not used in one year, then it can carry over to the subsequent year allowing for a 20% penalty free withdraw. Other contracts will allow for higher principal withdraw percentages as outlined in the contract.
IRA Annuity Required Minimum Distributions
All annuity accounts allow for penalty free access to the required minimum distributions that are mandated by I.R.S. once the owner has reached age 70 1/2. In short, your chosen insurance company cannot penalize you for what the federal government requires.
That is why fixed and indexed annuities are popular accounts when establishing stretch or beneficial IRA accounts. Conservative investors will choose an annuity as they are designed to efficiently credit interest and systematically disperse RMD amounts each year without exposing the investment to market fluctuations.
Principal Withdraws for Health Concerns
Annuities offer special provisions for those with major health concerns. If you are in need of long term care, then most contracts allow for sizable penalty free withdraws if not complete access to the principal. As part of the recently enacted Pension Protection Act, many annuity accounts also allow for income tax free withdraws for extended care.
Owners who are diagnosed with a terminal illness also will be provide with enhanced liquidity options. In most cases, the insurance company will allow for penalty free distributions of the entire accumulated value should it be wanted or needed.
Annuities Offering Return of Premium
Finally, and this is something new to the annuity marketplace, some policies allow for a full return of premium. You may not receive any interest should you surrender the account early, but you can withdraw your entire premium without losing any of the invested principal.
This is beneficial for those who might need to surrender the contract in the first couple of years. After two or three years, most fixed and indexed annuities will have credited enough interest to overcome the penalty percentage amount. That way, the owner can withdraw more than what was originally deposited.
Policies including a return of premium provision are suitable for those concerned about large future expenses and for those who want total access to the investment should something unexpected occur. A return of premium provision allows liquidity conscious consumers to rest assured during the early years of their contract.
Annuity Laddering Strategy
It is prudent to invest for an annuity term that meets your known present and future needs. And it is wise for those who need regular access to income and/or principal to use an immediate annuity account or a laddering strategy in order to insure regular access to their funds.
By using a laddering strategy through the purchase of multiple annuities with various maturity dates, you can assure that reasonable sums of principal will come due every couple of years. If the annuity principle is not needed, then the account can be reinvested for another similar term. Just like bank CD’s – annuities can provide ample liquidity when laddered properly.
Summary, Information and Quotes
Annuity investments are not appropriate for everyone. While fixed and fixed indexed annuities provide unmatched safety and above average growth potential, investment liquidity may be what is needed most.
You simply would not invest money in a ten year account that you know will be needed two years from now. It is important to discuss your overall financial needs with an agent before investing to insure the purchase of a suitable account.
Hyers and Associates, Inc is an independent and national provider of annuity investments. Contact us today to discuss annuity quotes, illustrations and information regarding any of the above mentioned accounts or strategies.
Category: Annuities, Articles
There are three types of deferred annuities for investors to choose from in order of least to most risk: fixed, fixed-indexed, and variable. Variable accounts are most risky as they are directly tied to the ups and downs of the overall stock market which is why you you see variable annuity complaints.
In an attempt to lessen the risk of investment loss associated with variable annuities, many insurance companies now offer guaranteed death benefit and/or a living income benefit riders. It is important to understand how these riders can affect future account values and withdraw options.
Variable Annuity Complaints: Death Benefits
Death benefits were the norm in most annuity contracts over the last decade or so. Annuitants paid a small fee each year and in turn were offered a guaranteed death benefit that would equal a predetermined growth or accumulation value in the annuity policy. These are sometime referred to as “high water-mark” contracts.
The problem is the stock market has been extremely volatile over the last decade and this volatility appears to be an increasing trend. There have been at least two significant economic downturns that caused precipitous drops in all of the major market indexes. This caused several variable annuity contracts to have a significantly higher death benefit (high water mark) than living benefit (walk away value) for the owner.
In reality, what started as an annuity account quickly turned into a life insurance contract due to a substantially higher death benefit. Most annuities were worth more to the owner at passing than during his or her lifetime. That might be acceptable if policyholders were only concerned about their heirs, but that is usually not the case or life insurance would have been purchased in the first place.
Furthermore, when withdraws were taken from the account either through required minimum distributions or for living expenses, then the leveraged death benefit would decrease in kind. In this way, many variable annuity owners were stuck with a confusing, hard-to-value investment.
Variable annuity policyholders might be hesitant to cash in their account for fear of losing the higher value that might be passed on to their beneficiaries at passing. At the same time, they wanted an investment that was more predictable and less volatile. Those competing needs simply did not allow for enough investment flexibility and choice.
Variable Annuity Lifetime Income Riders
As oppose to a life insurance rider that provides a potentially higher contract value at death, this living benefit provides a guaranteed income stream to the annuity owner for a predetermined period of time – usually life.
In this way, there are two values at play. The actual value of the contract (subject to market fluctuations) that allows the owner to walk away at the end of the term; and the second value or lifetime income value if the contract is later annuitized.
The lifetime income account value increases each year by a predetermined amount (6% for example) and costs a few basis points to the owner each year – perhaps 1/2 of one percent. Thus, if and when the market collapses, the income account value will be much higher than the walk away value.
In order to withdraw the maximum from the annuity, the owner must annuitize the contract over his or her lifetime and has in essence purchased a future income stream, but not a deferred annuity. If a future income stream was needed, then there are safer annuities offering such guarantees.
Just like the guaranteed death benefit, the living benefit rider causes the variable annuity to morph into a different type of investment or what is commonly referred to as an immediate annuity. And just like the former, the owner may feel they are stuck with an investment they did not originally purchase.
The insurance company can guarantee a 6% step-up each year on the income account value because of the yearly charge and the fact that they will control all deposited funds for the life of the owner. Insurance companies will make some of their money back during the lifetime payout process.
Walk Away with the Accumulated Annuity Value
Of course, there is nothing that prevents owners from transferring the deferred variable annuity contract to a safer investment at the end of or during the investment term. When the income or death benefit account value is much higher than the walk away value however, this can be a very difficult choice to make.
It is human nature to try and obtain the most value from any investment. Thus, many investors who own variable annuities end up holding them beyond the original term – longer than they anticipated when the account was originally funded. And too often the investor is disappointed in the market performance which caused the annuity to become something other than for what it may have been intended.
The Rise of the Fixed and Equity-Indexed Annuity
For those who are looking for an opportunity to exit an under-performing variable annuity, there are viable options. Both fixed and equity-indexed annuities offer safety, security and predictable future growth. But most importantly, the owners can walk away with all accumulated funds at the end of the term. There is no fear of giving up possible gains by losing out on a death benefit or lifetime income rider.
Several insurance companies offer fixed indexed annuities with reasonable potential for returns, up front premium bonuses, and the ability to lock gains in each year. The up front premium bonus can help offset the loss of principal in a variable annuity. Additionally, transfers can be done without incurring income taxes should the older annuity have eked out any gains.
Contact Us For Annuity Assistance
Hyers and Associates is an independent agency marketing fixed and fixed indexed annuities throughout the country. Should you own an under-performing variable account and are in need of advice or an exit strategy, we can help make a suitable recommendation. Contact us today!
Category: Annuities, Articles
Unfortunately, there is quite a bit of misinformation that has spread about annuity investment contracts. What is not clear is whether these untruths are intentional or a general lack of knowledge, but it is beyond time to set the record straight.
One of the biggest concerns potential annuity investors have is what happens to their money whey they die. For reasons unknown, there is a misconception that the insurance company keeps the balance of the account at passing. This is simply not true.
What Happens to My Annuity at Death?
The majority of annuity contracts are either fixed, indexed, or variable in nature. These investments are either in deferral or are used for regular interest and/or occasional principal withdraws.
In almost all cases, when an annuity owner(s) dies, the balance of the account simply passes to a named beneficiary. The beneficiary designation in the contract will usually list family members and the respective percentages each receives.
Annuity owners often setup their spouse as the primary beneficiary and their children and/or grandchildren as contingent beneficiaries. In some cases, a trust will be listed as a reliable means to distribute the annuity proceeds.
Annuity Beneficiary Designation and Probate
If, for some reason, there is no living person or trust listed as the contract beneficiary, then the annuity would likely be subject to the probate process. In this way, probate court would decide who inherited the annuity proceeds like it would any other asset with no beneficiary designation.
However, even with no listed beneficiary, the insurance company underwriting the annuity would not receive the proceeds. It is important to note that most annuity contracts are designed to avoid probate in the first place. (It is a good idea for annuity owners to regularly check their beneficiary designations as part of any estate plan.)
Immediate Annuity Contracts
There is one type of annuity account, commonly referred to as an immediate annuity where, in one instance, the insurance company can keep the undistributed funds when the owner dies. Immediate annuities are the least common type of contract and only suitable in certain situations.
First, it is important to understand how an immediate contract works. When an immediate annuity is purchased, the owner deposits a lump sum with a chosen insurance company.
The lump sum is then used to create a regular stream of income payable to the insured for a set number of years or a lifetime. In this way, an immediate contract pays a portion of the principal and earned interest each payment cycle.
Lifetime Annuities and Period Certain Guarantees
There are several fail-safe riders that can be attached to an immediate annuity account that guarantee the insurance company will pay back all deposited principal and earned interest during the insureds lifetime or that of their chosen beneficiary. This can be done through what is called a “period certain.”
The term period certain simply means the insurance company is obligated to distribute both principal and interest for a certain number of years. If the insured passes away before the period certain has been satisfied, then the payments will continue to a named beneficiary for the remainder of the contract.
Thus, the only type of annuity that allows the insurance company to keep the undistributed balance of the investment when the owner passes away is a lifetime immediate income annuity account with no period certain.
All other annuity investments will pass the entire balance of the account to the named beneficiaries in a lump sum or through regular installment payments when the owner passes away.
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In summary, almost all annuity investment accounts are setup to pay the entire account balance to the named beneficiaries. The owner of the account has the ability to setup the distribution in a manner that best suits his or her tax, investment and estate planning goals.
Annuities are valued investments for their unmatched safety, regular income distributions and also because they can be setup to avoid probate. It is important to speak with a knowledgeable agent in order to understand what you can expect from your policy now and in the future.
Category: Annuities, Articles, Retirement Planning
As an annuity agent, I am often asked which insurance company offers an indexed annuity with the best returns. And that is not an easy question to answer. There are dozens of companies offering several fixed indexed accounts each.
However, I did come across an annual statement recently that even amazed me – and I have been working with indexed annuities for well over a decade.
Unimaginable One Year Gain In Fixed Annuity
Full disclosure: This was not a client of mine, but the statement was authentic and dare I say mind blowing. This particular indexed annuity returned over 57% during a twelve month cycle for its owner. That was far and away the best one year return I have ever seen on paper.
The aforementioned annuity owner made a 57% interest return on his investment and his interest was locked-in and became part of the principal. (This assumes the annuity owner did not withdraw some of the gains.) That is simply an amazing return for a non-variable investment that has no direct ties to the market.
Indexed Annuity Gains – No losses
To be fair, a return this high is extremely unusual in an indexed account. Most indexed annuities have been returning around 20% over the last twelve months (March to March or April to April.) But this example certainly illustrates the power of indexed accounts.
What other fixed income, insured account can offer returns north of 20%, lock those returns in each year, and do it all without subjecting your principal and earned interest to stock market losses? None that I am aware of.
Understanding Indexed Annuities – Moving Parts
Elements of annuity investing that are often overlooked are the spreads, caps, and participation rates.
Several annuity providers monkey around with these numbers from year to year and when they are changed in favor of the insurance company, it can greatly reduce your future earnings potential.
Why do I bring this up? In the case of the person with the 57% rate of return, his spread, cap, and participation renewal numbers did not change one iota on his anniversary date. Thus, his annuity has exact same earnings potential over the next twelve months as it did before.
The annuity provider that credited the 57% is a well known and very well rated company in the marketplace. They offer several terms and accounts to choose from, but their five and ten year accounts are most popular. The unnamed annuity investor who locked-in this massive gain owns a ten year account.
Lock-In Yearly Interest Using Indexed Accounts
Let’s take a step back for a moment and remember the value of indexed annuities. While double digit gains are fantastic during times like these, it is the unprecedented safety these accounts provide that can be most valuable for their owners.
There are several unknowns that can cause you to lose substantial amounts of money in the stock market. We have experienced all kinds of world and economic events over the last decade that have derailed stock markets here and abroad on more than one occasion.
When the market goes down, your indexed annuity principal and earned interest are safe however. You cannot lose money when the market inevitably corrects again and again. If you are more interested in protection from market losses and you still desire the potential for above average returns, an indexed insurance product can be a very wise choice.
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I would imagine that you want to know who offers a fixed annuity that returned 57% in one year. And I will be happy to tell you.
Contact us and we will email you brochures and personal illustrations. Working together, we can decide if an indexed annuity is a suitable investment as part of your overall portfolio.
Category: Annuities, Articles
Indexed annuity accounts credit interest based on the performance of chosen stock and bond market indexes, however they are not variable in nature and have no direct market exposure. This simply means that when the market goes down, there is no risk of losing your invested principal or interest gains from previous years.
During the past twelve months, the markets have performed well and this is good news for those who own an indexed annuity. Many accounts have produced returns of 15%-20% or greater over the past year.
Indexed annuity owners are most reassured by the fact that their earned interest gains cannot be lost in subsequent years if/when the market corrects again.
Indexed Annuities Avoid Market Losses
If you have owned an indexed annuity over the past decade, then you have experienced first hand the above average growth, reliability, and safety these accounts provide.
The stock market has twice corrected significantly over the past ten years causing massive losses for investors on both occasions.
Indexed annuities don’t participate in down years however. The worst return you can experience is one that is 0%, but nothing below that number.
But when the market performs well, like it has over the past twelve months, then these accounts can credit significant interest to your principal. Assuming that the interest is not withdrawn, it becomes part of the principal and the account resets for the next year. If the interest is needed, then most annuities allow for a 10-20% annual withdrawal.
Indexed annuities are quite popular for those in need of safe monetary passage during or near retirement. Too much wealth has been lost over the last decade and annuity products offer a secure alternative to the unforeseen risk associated with the stock market.
Choosing a Suitable Indexed Annuity
It is important to understand that returns will vary from policy to policy depending on factors such as the anniversary date of the contract, index account chosen, as well as the spreads, caps and/or participation rates offered by the annuity provider.
It is important to work with a knowledgeable annuity agent before investing so that you know what to expect from your policy. There are several moving parts associated with these accounts and some are simply designed to return higher interest than others. You should review your account each year on its anniversary with your agent so as to maximize its potential.
Are Your Investment Dollars on the Sideline?
Any investment that offers potential returns over 15%, avoids market losses, and protects both the principal and earned interest each year can be a very wise choice for cautious investors. You may have investment dollars sitting on the sideline that you no longer wish to be exposed to significant downside losses.
If you have placed your investment dollars in CD’s, money market or other fixed income accounts to avoid losses, but you still desire the opportunity to experience double digit growth, then you may want to consider an indexed annuity account.
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We are an independent annuity marketing agency licensed with several providers. We offer a wide array of indexed annuities for our clients depending on your needs, goals and investment time horizon. Contact us today to learn more about your indexed annuity options.
Category: Annuities, Articles
It’s April 15th and while many have already filed their tax returns, some are still scrambling to get their documents in on time. Thus, it is an appropriate time of the year to talk about different ways to reduce your income taxes.
If you wish to reduce the amount of taxable income on your 1040 or are contemplating additional deductions, then you need to keep certain insurance policies in mind. There are several insurance and investment accounts that can lower your tax burden when setup properly.
Listed below are a few of the most common strategies and policies.
Annuity Investment Accounts Defer Income Taxes
If you are a fixed income investor primarily using certificates of deposit, then you might be creating unneeded taxable income. Whether or not you withdraw the interest, your CD’s are taxable investments – plain and simple.
If you don’t need income on a regular basis, then you should consider investing in a fixed or indexed annuity account.
Annuities do not generate taxable income so long as you allow the interest to compound. You can defer taxes in a non-qualified annuity for your entire lifetime if you wish.
If regular income is unneeded, you can determine how much and when you want to withdraw it. Thus, you are in control of how much (if any) of your interest will be taxed.
It is also worth pointing out that fixed annuity accounts offer higher interest rates than most bank savings instruments. Additionally, your deposits are insured up to a total of $300,000 in most states. And no, the insurance company does not keep your principal or interest upon death. All accumulated funds are payable to your named beneficiaries at passing.
Life Insurance Proceeds Avoid Income & Inheritance Taxes
Life insurance may be the single best vehicle for tax avoidance. While these policies should not be sold as “investments” they certainly have all the attributes of a good one. Whole life insurance and indexed life policies are very safe and pay reliable interest based on the fixed internal returns declared by the policy or the chosen market index.
Life insurance grows tax deferred like an annuity account. If you do not withdraw the interest or gains, then no income taxes will be due – ever. But unlike an annuity, life insurance proceeds pass income tax free to your beneficiaries. That’s right, no income taxes are due whatsoever.
This is why single premium life insurance policies have become so popular. Rather than pay income taxes on the interest generated from your bank CD, you can easily purchase a life policy with the principal. Most single premium life contracts require very little underwriting.
The single deposit would create an immediate death benefit much larger than a CD or annuity account could ever promise and the cash value would grow each year. You would have access to the entire invested deposit (cash value) amount almost immediately if it was needed for an emergency or anything else. And many policies offer an accelerated death benefit that can pay for long term care expenses.
Finally, in states like New Jersey and Pennsylvania, life insurance proceeds made payable to a named beneficiary are not subject to the state inheritance tax. This is a significant advantage over almost all other accounts in states with this unique, additional tax.
Life policies offer guarantees, liquidity, long term care benefits, income tax avoidance and can avoid inheritance taxes as well. Talk about a win win “investment” vehicle.
Write Off Your Health Savings Account Contributions
If you are in the market for health insurance and you are comfortable paying incidental expenses out of pocket, then a health saving account might be right for you. A HSA is a separate account that you can contribute thousands of dollars to each year. And the best part, all contributions can be written off as a tax deduction up to certain individual and family limits.
The funds grow tax deferred and can be withdrawn tax free for qualified medical expenses! If you or your family is in need of additional deductions, then setup your health savings account and contribute the maximum amount each year. And make certain that it’s used to pay for the many qualified expenses that the I.R.S. allows. You should become familiar with what qualifies as a medical expense at the I.R.S. website.
And once again like an annuity, all funds belong to you. Should you later cancel your health insurance or switch to a different type of policy, then you can withdraw all accumulated funds from your HSA. But remember, if the funds are not used to pay for medical expenses then they would once again be subject to income taxes. No penalties would be due however.
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In summary, these are three simple ways to reduce your tax liabilities each year. While one size does not fit all, the strategies can be beneficial for most.
It is always wise to talk with a knowledgeable agent about the “big picture” before purchasing a life insurance or annuity policy and to make sure that you understand any potential limitations of these products.
And you also want to make sure that you know exactly what to expect from your health insurance policy and health savings account as well. A tax advisor should be included in the discussion.
Please contact us to learn more about tax avoidance strategies that can help you preserve more of your hard earned wealth.
Category: Annuities, Articles, Life Insurance, Wealth Transfer
If you are considering investing in a fixed indexed annuity, you should become familiar with a few terms. Almost all indexed annuities have internal moving parts referred to as spreads, caps, and participation rates. The fluctuations of these moving parts can significantly affect your annuity’s rate of return now and in the future.
Insurance companies will adjust their caps, spreads and participation rates each year and in doing so will either increase or decrease your potential rate of return. Thus, it’s a prudent measure to speak with an experienced agent about the renewal history of any annuity provider that are considering.
Annuity Renewal History And Interest Gains
Insurance companies with a history of increasing spreads while lowering caps and participation rates in their policies should be viewed with a cautious eye.
Conversely, an annuity provider with a favorable track record of adjustments; one that consistently passes on more interest gains to their policyholders should immediately jump to the top of your list.
There are several factors that will affect the moving parts in your indexed annuity. Overall market volatility, the price of options contracts, portfolio performance of the given insurance company and the overall state of the economy are just a few macro examples.
However, some annuity providers tend to account for these future unknowns better than others. Even when their portfolios are under pressure, they still offer you the opportunity for better gains than many of their competitors.
Understanding Indexed Annuity Caps – Maximums And Minimums
Indexed annuity caps are simply a limit on the amount you can earn in a given time period – usually one year. Many indexed sub-accounts work with a cap no matter the crediting strategy or index you have chosen.
Insurance companies also offer indexed sub-accounts that are uncapped and have no limit to the returns on your investment. Uncapped sub-accounts usually have much larger spreads than those operating with a maximum cap. Yes, both spreads and caps can conspire to increase or decrease your interest gains.
For example, your annuity provider might offer a maximum limit (or cap) of 7% you can earn in an indexed account during the first contract year. If the cap on your earnings potential was lowered to 4% the following year, then your earnings potential has decreased significantly .
The most you could earn would now be 4% in this hypothetical example – as oppose to the 7% renewal you might have been expecting. You the investor would justifiably be upset with such a large decrease in future earnings power.
How Spreads Affect Fixed Indexed Annuity Growth
Indexed annuity spreads work much like caps when they are adjusted annually. The higher the spread, the lower the return will be. In essence, the spread comes off the top each year before any interest gains are credited to your investment principal.
If you were using an averaging index strategy and the spread for that sub-account was 2.5% for example, then only the gains above 2.5% would be credited to your invested amount at the end of a twelve month cycle.
However, if the spread increased to 5.0% upon renewal the following year, the account would need to make over 5.0% before any interest gains would be credited to your invested principal. In this example, the spread has increased by 100% and your potential return has decreased by 2.5%. Again, this type of increase is not favorable to you or your invested dollars.
Fixed Indexed Annuity Accounts And Participation Rates
Participation rates are usually found in point-to-point indexing strategies. The higher the participation rate, the more interest you will be credited with when the market index (S&P 500 for example) is moving up.
Let’s say that you were offered an uncapped, point-to-point account with a 60% participation rate. If the chosen index increased by 10%, then you would receive 60% of the gain or a 6% rate of return on your money that year. If the participation rate renewed at 30% the following year, then you would only be credited with a 3% return on your money – all other factors being equal.
When the insurance company underwriting your annuity makes such a drastic change to the participation rate, which some do, your prospects for reasonable returns are reduced dramatically – even if the overall markets are performing well.
Summary and Annuity Video Presentation
As you can see, fixed indexed annuities not only offer several crediting strategies, but they also have several moving parts such as caps, spreads, and participation rates.
While the crediting strategy you and your agent decide on will go a long way to determine your gains, the moving parts inside the chosen strategy will play just as an important role, if not more important, in determining your interest annuity growth.
It does not matter how well your index and crediting strategy are performing if your money can’t participate in a reasonable portion of the upside. That’s why it’s important to talk with an experienced agent about the renewal history of any insurance company you might do business with.
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At Hyers and Associates, we work with hundreds of indexed annuities. We can help you choose a suitable indexed annuity account that fits your time frame and investment needs, but most importantly one that offers you the best opportunity for interest credits now and in the future. Contact us for more information today.
Category: Annuities, Articles
You may wish to exchange your old annuity or life insurance policy for a new one for any number of reasons.
Section 1035 of the IRS tax code allows you to do so while deferring any taxable gains in your old policy.
The accumulated gains in your old policy can be transferred to a new insurance policy on a tax-free basis. In most cases, you can continue deferromg income taxes in your new policy for as long as you wish.
What is a 1035 Tax Free Exchange?
A 1035 tax-free exchange is simply an IRS tax code. It allows for the rollover of a non-qualified annuity (or transfer of a life insurance policy) to a new annuity or life policy of equal or greater value.
Capital gains and/or income taxes will not be realized from this type of transfer when completed properly.
There are only three types of 1035 exchanges:
- Annuity to Annuity Transfer
- Life Insurance to Life Insurance Exchange
- Life Insurance Cash Value to Annuity Policy
The I.R.S. does not allow for a 1035 exchange from a tax-deferred annuity to a life insurance policy. If you want to buy a life insurance policy with the proceeds from an existing annuity, you will first need to annuitize (or surrender) your annuity and pay taxes on any deferred gains.
That is not to say that trading in an annuity for a life policy is a bad idea (it can make a lot of financial sense) but it would not fall under the 1035 tax-free exchange rules.
Non-Qualified Annuity 1035 Tax Free Exchanges
Transferring funds from one annuity investment to another is the most common example of a 1035 transfer. Oftentimes this is done to establish a new, better-performing policy.
Perhaps your old annuity has a lower interest rate, you are interested in a first-year premium bonus, or you would rather exchange a variable annuity for a more conservative fixed or indexed account. There are many reasons you might want to exchange a non-qualified annuity. (View current fixed annuity rates here)
This type of exchange only defers taxation if you move from one non-qualified annuity to another. Non-qualified accounts are those in which you have already paid taxes on the invested principal, but not the deferred gains.
Conversely, a qualified annuity is one where the invested balance has not yet been taxed at all – like an IRA or 403b. You can roll over IRA and 403b annuities on a tax-free basis, but this is not technically a 1035 tax free exchange.
You can exchange your existing non-qualified annuity for a new one with the assistance of a licensed insurance agent and by completing the proper paperwork. It is important to note this exchange must be done properly – otherwise, the transaction can result in a taxable event. We help our clients avoid this issue.
Both insurance companies involved will require properly completed transfer and replacement forms as well as a Letter of Instruction. Cashing in your old annuity and taking constructive receipt of the account balance will not meet the IRS standards.
It’s smart to work with a knowledgeable agent to ensure you comply with all 1035 rules & regulations. Failing to do so may create taxable gains that can not be undone.
Tax Free Exchange Of Life Insurance Cash Value
This involves the transfer of the accumulated cash value in your old life insurance policy to a new one. You are allowed to transfer all (or some of) the cash value in your variable, universal, or whole life insurance policy and deposit the funds on a tax-free basis into a new life insurance policy.
You can transfer your cash value into many policy types, but term life insurance is not one of them. Term life insurance has no cash value for the insured. Additionally, you cannot avoid income taxes by purchasing a term policy with the cash value from an existing whole, variable, universal, or indexed life contract.
You might consider a 1035 life insurance exchange if you want to establish a new single-premium life insurance policy. Perhaps your life insurance needs have changed and you no longer wish to pay future premiums. In other cases, you might want to establish a new policy better suited to your current financial needs.
Transferring Life Insurance Cash Value To An Annuity
You can also withdraw the cash value from your life insurance policy and transfer it tax-free to an annuity account. This is perhaps the least common 1035 exchange strategy, but still valuable in some cases.
You may not, however, transfer any gains from an annuity account to a life insurance policy without first paying taxes on the deferred gains in the non-qualified annuity.
It’s important to note that life insurance policies offer several tax advantages annuities do not. At passing, all proceeds from a life policy can be withdrawn tax-free by your beneficiaries – including the gains. And life insurance can also avoid federal estate taxes and state inheritance taxes when set up properly.
If you are dissatisfied with your life insurance policy, it may be advantageous to transfer the cash value to a single premium policy rather than to an annuity account. If you desire safety and predictability, a single premium whole or indexed life insurance contract can be a good alternative to a variable life policy. Both indexed and whole life policies will earn interest and can increase in value each year based on the performance of the policy.
Request Assistance, Quotes And Illustrations
There are several reasons you might exchange an old life insurance or annuity policy for a new one. You might be seeking a higher rate of return or you may wish to establish a more conservative investment account. In the case of life insurance, you may simply wish to transfer the existing cash value to a paid-up policy so you can avoid ongoing premiums.
At Hyers and Associates, we work with several highly-rated insurance companies providing very competitive life and annuity policies for our clients. Contact us today for more information about a 1035 tax free exchange.
Category: Annuities
Regardless of the type of annuity account you own (fixed, indexed, immediate, or variable) it will fall into one of two categories; qualified or non-qualified. Your options will depend which type you have and/or inherit.
An annuity cannot be both qualified and non-qualified. It’s one or the other. There are significant differences between the two and understanding them can help you plan for taxes, distributions, exchanges, and rollovers. Missteps can cause penalties and loss of principal and/or interest.
What is a Qualified Annuity Account?
A qualified annuity is simply an account where taxes have not yet been paid on the principal, any contributions, or growth in the account. Common examples of qualified accounts are IRA’s, 403(b)’s, 401(k)’s and various other retirement plans.
All distributions from a qualified annuity (principal, interest, and investment gains) are subject to income taxes. The IRS treats these types of accounts differently while you are alive and when you pass away. You must follow certain rules for contributions and withdrawals.
Mandatory Distributions (RMDs) From Qualified Accounts
Owners of a qualified account will be required to take mandatory distributions by the IRS – usually at age 72. These distributions are based on your life expectancy and must be reported as income each year. You can begin withdrawing from your qualified account at age 59 1/2 if you wish. These withdrawals will also be taxable, but not subject to penalties mandated by the IRS.
You can roll over a qualified annuity to another qualified account without creating a taxable event. This might be done to increase the return on your policy or to change investment strategies. However, the same rules will apply when it comes to taxes. So long as you are in a taxable income bracket, income taxes will be due on any voluntary or mandatory distributions from the new account.
What is a Non-Qualified Annuity Account?
A non-qualified annuity is one where taxes have already been paid on the principal – or initial investment. Premium deposits could come from a mature certificate of deposit, a checking or savings account, a brokerage account, or an existing non-qualified annuity.
Only the earned interest is taxable in a non-qualified annuity – and that is only when the interest is withdrawn. If you ever decide to withdraw the principal of the account, then taxes would not be due on that amount. However, you have two options with the earned interest: You can either withdraw it as needed or reinvest it on a tax-deferred basis for a later date.
If you choose to withdraw the interest, you must wait until age 59 1/2 even though this is not technically a retirement account. Otherwise, the IRS (not the annuity company) will penalize you for an early distribution. However, you will never be forced by the government to take your interest or principal out at any age.
Advantages Of Compounding Tax-Deferred Growth
You can also choose to reinvest your interest gains. This highlights one of the most significant benefits of a non-qualified annuity. If the gains are reinvested, then they grow tax-deferred for as long as you wish.
This way, your funds will benefit from the effects of compounding interest. The unneeded taxable income now grows tax deferred and would not be declared each year like it would with a certificate of deposit or money market account.
This is a wise choice if you wish to reduce taxable interest gains in your overall investment portfolio.
What Is A 1035 Tax-Free Annuity Exchange?
This exchange is only possible from one non-qualified annuity to another. This allows you to invest in a new annuity while avoiding taxes on the deferred interest not yet withdrawn from the old annuity. You might do this to increase the returns on your annuity account and/or to lock in a higher interest rate for a set period of time. If your annuity is mature and total liquidity is not an issue, then a 1035 tax-free exchange can benefit your investment returns.
In summary, annuities will always fall into one of the above two categories. How the account is taxed, distributed, rolled over, or exchanged will vary depending on your needs and IRS regulations. It is important to discuss all of your options with an experienced annuity advisor and your accountant before making any changes.
If you wish to know more about these accounts or are in need of advice, please contact the annuity experts at Hyers and Associates today.
Category: Annuities, Articles, Retirement Planning
As the overall markets have swooned and once plush retirement accounts have lost value, you might be interested in a guaranteed lifetime stream of income.
Commercials are more prevalent and many financial firms are now advertising the merits of this simple concept. But what are the financial products behind these guarantees and how can you benefit from lifetime income?
Lifetime Annuity Income Accounts
Guaranteed lifetime income can only be provided from one financial instrument – an annuity account. Sometimes referred to as an immediate or lifetime annuity, these accounts pay principal and interest for your entire life. In this way, they operate much like a pension plan from a former employer.
How Does Guaranteed Lifetime Income Work?
In its simplest form, a lump sum deposit is made into an annuity with a trusted insurance company. Based on your age, gender and initial initial investment – a monthly stream of income will be generated from the deposit. Principal and interest will be paid out for the rest of your life.
You can fund a lifetime annuity with before or after tax dollars. Some investors choose to rollover an IRA, 403(b) or 401(k) account while others might invest using certificates of deposit, money market funds, brokerage accounts or mutual funds.
What Are The Advantages of an Annuity Account?
Those who invest a portion of their retirement dollars in an annuity will always have the security of guaranteed income. Not only will you receive principal, but you also receive the interest on your investment. Lifetime payments will never decrease and are unaffected by stock and bond market declines. By reducing your exposure to the overall markets, you can be assured that a portion of your retirement is safe.
How Safe Are Annuities?
Annuity accounts are backed by the full faith of the chosen insurance company, but more importantly are insured by the Guaranty Association of the State where you reside. Annuity carriers are one of the most regulated sectors in the financial industry. They must carry reserves to back their claims and they cannot lend your money out.
Recently, large banks like Washington Mutual and enormous investment firms like Bear Stearns have gone bankrupt, but the annuity carriers have withstood the economic downturn. This is due in large part to their highly regulated nature and reserve requirements.
What Happens To My Annuity When I Die?
It will depend on how your annuity has been setup. A lifetime annuity will cease all payments at passing unless you have added what is called a “period certain.” This is insurance speak for a guaranteed period of payments. And some annuities with lifetime income riders will continue to pay to a spouse or will send any remaining balance to your named beneficiaries.
If you purchase a lifetime annuity with a 10 year period certain for example, then all payments will continue for a minimum of ten years. A period certain guarantees that you or your beneficiaries receive the initial investment and interest should there be a premature passing. If you live longer than the ten year period, the payments will continue until passing. Period certain lengths will usually vary between 5 and 30 years if they are chosen.
In other cases, a joint and survivor with life clause can be added for married couples. This clause will guarantee payments for the lifetime of both spouses. Should one spouse pass away, then the living spouse will continue to receive payments for the duration of his or her lifetime.
It is important to note that monthly payments will be greatest when a period certain or joint ownership has not been selected. Choosing a life only annuity will make the most sense for those who do not worry about providing for a spouse or any chosen beneficiaries.
What Are The Tax Implications?
It depends on whether the annuity is funded with qualified or non-qualified dollars. A qualified account is one that has not been taxed like an IRA, 403(b), 401(k), etc. All funds distributed from a qualified account, including a qualified annuity policy, will be taxed as ordinary income.
However, non-qualified deposits (after tax dollars) distributed through a lifetime annuity offer tax advantages to the owner. The annuity will generate income tax with each distribution, however the principal will never be taxed. Only the interest growth is taxed as ordinary income.
The interest is not received all at once, but over the lifetime of the annuity. The majority of the systematic payment each month is principal and thus excluded from taxes. This is often referred to as the exclusion ratio. By spreading out the taxable gains over the life of the annuity, the owner will pay less in income taxes.
What If I Change My Mind?
In most cases, once the stream of lifetime income has been setup it is irreversible. Very few insurance companies allow for a lump sum cash payment in lieu of the monthly payments. There are entrepreneurial companies that specialize in the purchase of lifetime annuity accounts, but the owner will receive less than face value.
However, annuities that are purchased with a lifetime income rider will allow you to turn your income on and off. And they will also allow for a full distribution if you change your mind. The only disadvantage is that you have paid for an income rider that you may not have used.
Is This An Advisable Retirement Strategy?
Most financial advisors will say yes. Annuities have gained popularity during the last decade as the overall markets have not performed well. A recent Business Week article queried a cross section of experts near retirement and many discussed the use of lifetime and deferred annuity accounts to ensure reliable income.
There are those, however, who would still rather invest all of your nest egg in the stock market for their own financial gain. Some stock brokers dislike annuity accounts and trumpet the fees and commissions to agents and the insurance companies. It should be noted that fees and commissions associated with an annuity are no more than any other financial instrument – in fact they are usually less. Let’s remember that brokers have a lot to lose if their clients choose to safely invest elsewhere.
What If I Am Not Ready?
If you want safety and security, but are not yet ready for an income stream, then a tax deferred annuity can be purchased. Deferred annuities grow through compounding interest and can lock in interest rates for a desired number of years. When ready, the owner can transfer their entire deferred annuity into a lifetime account and begin a stream of income.
Deferred annuities usually pay more interest than bank certificates, money market and savings accounts. The owner is under no obligation to setup a lifetime stream of income (annuitize) at the end of the term. Many investors own deferred accounts for their entire lifetime and then pass them lump sum and penalty free to their named beneficiaries.
How Do I Begin?
It is wise to request quotes from several carriers. Monthly payments can vary drastically depending on the insurance company and the internal returns of the policy. Independent agents (like us) can filter several well rated insurance carriers to find the best lifetime account for you.
The agents of Hyers and Associates have access to many insurance providers and can help to ensure a stable retirement for you. Contact us for more information today.
Category: Annuities, Articles, Ohio Annuity, Retirement Planning
A 403(b) account is also known as a Tax Sheltered Annuity or TSA. These accounts can take many forms, but most typically are setup as a fixed or variable annuity. Teachers, employees of non-profits, and certain ministers can contribute during their working years should their employer offer this retirement option. Other investment options might include mutual funds and/or indexed or variable annuity accounts.
Typically, 403(b) retirement accounts are conservative in nature – especially if they use a fixed or indexed annuity as their primary investment option. Deposits in fixed investments will not fluctuate with the whims of the stock market and thus provide safety for teachers and the others who invest in them. Conversely, variable annuities and mutual funds will rise and fall depending on market conditions.
Can I Transfer My 403(b) To Another Annuity When I Retire?
The answer is yes. Retirement or separation of service from employment are both cause for transfer. Depending on your age, you can either rollover your funds to another TSA account or an Individual Retirement Account (IRA for short). Rollovers can be advantageous for those who want different investment options, higher guaranteed rates of return, continued tax deferral, and the ability to insure larger sums of money.
Is My 403(b) Insured?
Yes, but it is only insured up to certain limits depending on the investment options chosen. Variable annuities and mutual funds are not insured whereas fixed and indexed annuities are insured by your resident state’s Life and Health Insurance Guaranty Association. Limits can vary by state, but fixed and indexed accounts are usually insured up to $250,000 per account. Most Associations allow for up to three accounts with three different annuity providers for a total insured maximum of $300,000 per individual.
Thus, if you own a 403(b) worth $300,000 at retirement, you can transfer $250,000 into one separate fixed or indexed annuity and invest $50,000 in a separate account. Although, there are many annuity accounts wiht well over $300,000 today. Conservative investors may consider taking advantage of this rule.
Taxes and Required Minimum Distributions
A rollover or direct transfer would not be a taxable event if the funds are deposited into a new qualified annuity or other qualified investment account. Qualified accounts are ones where the entire balance is subject to future income taxes. All withdrawals from a qualified account are taxed as ordinary income to the owner.
When the account owner reaches age 70 1/2, then the IRS requires what is called a Required Minimum Distribution (RMD) based on life expectancy. The IRS has created life expectancy tables for account owners and their beneficiaries detailing the percentage that must be withdrawn each year.
What Happens at Passing?
At passing a 403(b), TSA, or IRA will transfer to your named beneficiaries. In most cases a spouse can adopt the account as their own and will only need to take a distributions of he or she is 70 1/2. If the beneficiary is your child, then they can withdrawal the amount in a lump sum and pay income tax or rollover the funds into a Beneficial IRA. Beneficial IRA’s (sometimes called multi-generational IRA’s) will require mandatory distributions regardless of age, but can defer taxes on a majority of the accumulated funds for the child’s lifetime.
In summary, 403(b) owners including teachers and ministers have several options upon retirement. Working with a knowledgeable advisor can allow for better returns, insure large amounts, and pass funds to named beneficiaries with fewer taxable consequences.
Contact us for more annuity information today.
Category: Annuities, Articles, Retirement Planning
There are certain economic cycles that occur every few years which drive up the interest rates in fixed annuity accounts. We are in one of those cycles now. Savvy investors can lock in very high annuity rates (yields/returns) that did not exist only a year ago.
View Current Fixed Annuity Interest Rates
Economic Turmoil Benefits Fixed Annuity Accounts
The most recent economic meltdown has many of us questioning the overall wisdom of stock and bond market investments. Consider in the last ten years, the overall markets have witnessed substantial losses – from the dot com bust to the current mortgage crisis and credit crunch. It seems to be one correction after another.
Banks have fared no better as institutions large and small issued loans to sub-prime borrowers and now are holding bad debt. The Federal Reserve has lowered interest rates several times in an attempt to unlock the credit markets, but that does not bode well for money market rates and certificate of deposit yields.
Credit Spreads Explained
So why are fixed annuity rate so high? The reason is that their interest crediting is primarily tied to government treasuries and credit spreads. While treasury yields are on the low side, credit spreads have increased dramatically. When the two are combined, fixed accounts can yield well over 5.50% depending on the annuity term and deposit amount.
Credit spreads primarily affect corporate bonds. When credit markets are not functioning properly and there is fear of corporate default, it is simply more expensive to issue debt. Large companies in little danger of default must issue debt with higher yields to fund their daily obligations. Insurance companies purchase these bonds, package them with treasuries, and then issue high yielding annuity accounts. They do all of this while assuming most of the risk. And fixed annuity accounts are insured for the consumer up to certain state limits – usually $250,000 per contract in most states and up to $300,000 per household.
When Interest Rates Are High – Invest In A Fixed Annuity
Thus, it is wise for consumers to consider a cd type fixed annuity account as a medium range or long term savings instrument. Typically, annuity terms will run between 2 to 10 years depending on the investor’s time horizon. If the interest is not withdrawn, then the gains will compound on a tax deferred basis. At the end of the term, the annuitant (owner of the annuity) can purchase a new policy or withdraw their funds in their entirety without penalty. The bottom line is annuities are a reprieve from low rates and market risk.
Category: Annuities, Articles
Federal Reserve recently lowered key interest rates in order to battle the current credit crisis. This is not good news for bank investors who have relied on certificates of deposit and money market savings accounts to save and/or generate income. When inflation is factored in, most bank instrument’s returns are at historical lows. Additionally, the volatility in the stock and bond markets is not a suitable alternative for most conservative investors.
View Current Fixed Annuity Interest Rates
Where Are Safe Fixed Interest Investment Accounts?
That leaves many savers asking where they can find guaranteed, safe and insured high returns. The answer may be surprising. It is the best kept secret that most bank employees and stock brokers hope remains undiscovered.
Fixed rate, high yielding annuity accounts are by far one of the best savings vehicles available to investors today. These insured accounts can generate guaranteed monthly income that far surpasses bank c.d.’s while avoiding the risk of the overall markets.
Popular Annuity Rates And Returns
As of late October, our most popular five year annuity yields 5.65% and our most popular six year annuity yields 6.00%. These rates are guaranteed for the life of the contract. Of course, there are other term options that usually range from 3 to 10 years. Generally, the longer the term – the higher the yield.
Comparing Annuity Benefits & Terms
At the end of the term, the investor can withdrawal their funds in entirety or choose to reinvest at the current rate. And contrary to popular belief, the deposit does not belong to the insurance company at passing. If the insured (also known as the annuitant) was to prematurely pass away, then the account balance will transfer to a named beneficiary.
Annuities also provide tax benefits that many other investments do not. If the insured does not desire income, then the account grows tax deferred. This is in stark contrast to all bank instruments. Annuity owners own a true, compounding savings instrument. An account that can also provide a lifetime stream of income at a later date. Learn more about annuities here.
In summary, when considering the current state of interest rates and unprecedented market volatility, a fixed annuity account can be an extremely safe and desirable option for investors who wish to reduce risk and guarantee returns.
Category: Annuities, Articles, Ohio Annuity
The most recent market turmoil has many conservative investors second guessing their investment decisions. Those near or in retirement have witnessed significant losses to their IRA, 401(k) and 403(b) retirement accounts. When the market crash of 2000 is factored in, many retirees have experienced an overall loss in their net worth for over ten years.
Too Much Risk
Investors are realizing that the stock and bond markets are not always the best place experience investment gains or preserve their retirement assets. There are too many unknowns, too much risk, and an overall culture of corruption and greed that have robbed clients of a secure retirement.
Asset Preservation
What else is available for those who can no longer stomach the violent swings in today’s marketplace? Are there accounts that can credit gains when the market goes up, but will not lose value during corrections, crashes, and economic downturns? The answer is yes and they have been around for years. Consumers who have invested in these accounts have not lost a penny during this latest market crash.
In fact, Fox News recently profiled a couple in retirement who wisely used this investment vehicle to preserve their wealth. (Watch the video) So what are the accounts? Fixed rate, indexed, and income generating annuity accounts are the investments that have weathered this ten year market storm.
Your broker and some in the financial media will tell you to walk away from such accounts, but let’s keep in mind that these are the same folks who recommended this market for the last several years – stock and bond markets that have caused unprecedented carnage to retirement accounts.
Safety in Fixed & Indexed Annuity Accounts
Thus, it may be wise to explore a safe, insured, guaranteed annuity account as an alternative to the unpredictability of a brokerage account. Contrary to popular belief, annuities are not generating commissions any higher than a typical brokerage house and the investor does not forfeit their account value at death. Most of this misinformation has been spread by those who are behind this market mess.
Our agency, has created several educational annuity articles and presentation that can be viewed on our site. Consumers who are interested in wealth preservation, reasonable gains, and peace of mind should explore their investment opportunities.
Category: Annuities, Articles
Consumers who need a guaranteed, stable and systematic income can establish an immediate annuity account. Also know as an annuitization or an income annuity, these accounts provide regular monthly payments for a specified period of time to the account holder. The payments will consist of principal and interest and continue for the term selected.
Several factors will determine the monthly payout including the annuitant’s age and gender, amount invested, current interest rates, payout duration, and whether the owner(s) wants the payment to be adjusted for inflation.
Several Income Annuity Terms & Options to Choose From
One of the first options to determine is the duration of the income stream. A client might only need income for ten years as part of a structured settlement or litigation award. In this case, an initial deposit can be calculated in order to determine a guaranteed monthly payment for ten years.
In other instances, clients will need guaranteed income for their lifetime. This is known as a life annuity and it is guaranteed to make payments for the life of the annuitant(s). Life annuities are often structured with a period certain to guarantee return of premium to the owner(s).
Life Annuity with Period Certain – Guaranteed Payments
If you invest in a life annuity with a 20 year period certain, then the income payment would be guaranteed for at least 20 years. Should the owner pass away prematurely, then the payments would continue to the named beneficiary. Insurance carriers will usually allow for a period certain of up to 50 years. However, the longer the selected period certain, the smaller the monthly payments will be.
A life annuity with no period certain will provide the largest monthly payment to the owner. This type of account is best for someone who needs maximum monthly income, but who is not concerned with providing benefits to a beneficiary.
Annuity Income Payments Adjusted for Inflation
Younger annuity owners may desire a payment that can be adjusted for inflation on a yearly basis. Most common are accounts that will increase monthly payments by a compounded rate of 3% or 5% year over year. Monthly payments in the first few years will be smaller than an income annuity without an inflation rider, but will increase substantially over time.
Income payments compounded at a desired percent take into account the time value of money. A $1,000 monthly payment today will not buy $1,000 worth of goods and services 20 years from now. Inflation protection allows consumers peace of mind as they grow older, especially if they have invested in a life annuity.
In summary, purchasing an annuity designed to take care of future need will take careful consideration. Shopping for the best rates is just as important as selecting the annuity term and inflation rider.
With the help of an experienced agent, annuity income planning can be designed to provide for a lifetime’s worth of needs. It is best to work with an agent who can provide quotes from several well rated carriers as payouts can differ significantly depending on the annuity parameters.
Category: Annuities, Articles
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