Life insurance shoppers want to know: What is the difference between whole and term life insurance and what type of policy should I purchase? The answer is usually simple depending on the circumstances.
Listed below are life insurance explanations as well as recommendations for purchasing a life policy, tax avoidance and estate planning strategies.
Whole Life Insurance Policies
Whole life is designed to cover the insured for his or her entire lifetime. A portion of the premiums pays for the cost of the insurance and a portion is invested in a fixed interest account usually referred to as the cash value account.
Over time the cash value will increase with additional premium deposits and interest credited in the fixed account. Eventually, the policy will be “paid up” meaning enough premiums have been deposited and the cash value has grown to cover the cost of insurance. When this occurs, the death benefit can also increase above and beyond the amount of insurance applied for.
Whole life has the advantage of covering the insured for life while also providing cash value for future needs. Owners can either withdrawal or borrow against their cash value for future monetary obligations. It is worth noting that there are several riders and versions of whole life insurance that can change the overall performance of the policy.
Term Life Insurance Coverage
Term life insurance is the least expensive type available. The insured pays the premiums for a set term (say 30 years) and in essence rents the insurance for that time period. There is no cash value built up in the policy and all benefits will cease to exist when the term has expired.
Consumers purchase term life to cover their families financial obligations in the event of an untimely passing. The insured might take into account future mortgage payments, college tuition, debt, the cost of raising children, and several other factors when purchasing term life. Like all life policies, there are variations and riders available in the term marketplace.
What Should I Buy A Term or Whole Life Policy?
In most cases, it is advisable to purchase term insurance. It is affordable and will provide peace of mind for the insured and his or her beneficiaries. Term will provide the cushion needed to in the event of a passing. Once the time period has expired, then conceivably the insured would be in a comfortable financial position – the kids are grown and out of the house and the mortgage is paid off.
Whole life makes more sense as a tax free investment that can be used to transfer significant amounts of wealth between generations. Life insurance benefits are tax free to the beneficiary(s) and can, in some states, also avoid inheritance taxes – Pennsylvania and New Jersey are two such states. Additionally, irrevocable life insurance trusts can be used to reduce federal estate taxes and to pare down owned assets.
Granted, this is a very simple explanation of the two most common types of life products. It is always best to work with a knowledgeable life insurance agency in order to find a suitable policy for your needs. Please contact our agency to learn more.
Category: Articles, Life Insurance, Wealth Transfer
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
Recent significant stock market declines and portfolio volatility have many investors inquiring, once again, about the safety of annuity accounts. Consumers ask, “Are annuities safe from a recession? Do they maintain value when the market goes down? Will they lock in my interest gains each year?” The answer is, yes. Investing in a fixed, an immediate, or an indexed annuity policy will protect your investment principal and gains from market losses.
Should You Wait Out Another Correction?
Unfortunately, many investors are suffering through similar pains to those experienced during the market slide from 1999 to 2003. Most (not all) brokerage accounts regained their losses from that period of time, but this recent downturn has quickly undone that progress.
It’s business as usual from the brokers – telling clients to wait it out. Yet, these same brokerage houses are busy selling stocks, trying to lock in profits while their individual clients absorb the losses. For many years the brokerage industry has shunned the safety of fixed annuity accounts while investor portfolios decline.
It begs the question, why should mom and pop investors participate in this turmoil again? Do they experience a higher standard of living when the market increases? Usually not, but they certainly feel the financial pain when the market contracts by ten or twenty percent.
Maybe younger investors can weather this storm, but there are those who cannot afford to experience these kinds of losses. Many senior investors are in retirement and counting on their nest egg to produce regular income. Or maybe they are near retirement and trying to decide how to best protect their IRA, 401(k) or 403(b) accounts for future income.
Is a Safe and Insured Annuity the Answer?
Annuity accounts are very beneficial for investors who need reliable growth, guaranteed income, and protection of their principal. Maybe the brokerage industry is winning the battle in the media, but annuity investors have been winning battle of asset preservation for the last ten years. Annuity owners have been protecting their principal and earned interest while experiencing above average returns on their investment.
You might ask yourself, “Have I not investigated annuity accounts because of what I know, or what I think I know?” If you are not sure, it may be worth learning more. A fixed or indexed annuity account can be a valuable alternative to a volatile brokerage account
Contact us today to discuss the safe, reliable and insured fixed rates and returns with fixed and indexed annuity accounts.
Category: Annuities, Articles
Recent market volatility resulting in portfolio declines has once again lead to a demand for safe, insured investments. With so many investment options available, many conservative minded consumers want accounts that guarantee principal, investment growth and/or lifetime income. We assist retirees who are in search of a safe place to invest retirement portfolios, IRA’s, 403(b)’s and 401(k)’s and cash.
Online Annuity Presentation For Your Education
As oppose to writing another article on the merits of safe annuity investing, we have created two presentations (posted below) where consumers can obtain an in depth annuity education. It is past time to debunk the myths and misinformation spread investment advisers who have lost significant wealth for their clients. The overall stock and bond markets have been in disarray for nearly a decade while fixed and indexed annuity accounts have safely and reliably increased in value.
Annuity Accounts Explained – Click on the Icon Below to Learn More
Our first presentation entitled “Consumer Annuity Boot Camp” will discuss the differences between qualified and non-qualified accounts. Knowing what category your money falls in will also help you plan for the future in terms of transferring funds and paying taxes.
From there, we offer a closer look into the types of annuity policies on the market today. We explain the differences between fixed, immediate and indexed policies. By viewing this presentation consumers can determine which annuity policy may best fit their overall investment objectives. It will also help them better understand the inner mechanics of annuity accounts.
Fixed Indexed Annuity Accounts Explained
(Editor’s note: Our second annuity presentation is currenlt being updated. We will re-post it soon.) Our second online presentation provides a detailed description of equity indexed annuity accounts. Topics include interest crediting examples, growth illustrations and an explanation of the mechanics associated with an indexed account. Consumers who wish for better potential growth than a traditional fixed annuity will benefit from viewing this presentation. Indexed accounts can be a viable alternative to stock and bond market investing.
Contact Us For Annuity Illustrations and Information
We are a full service, independent annuity brokerage and we can help you find the investment accounts that best suit your needs an goals. Contact us today to discuss your best options.
Category: Annuities, Articles, Ohio Annuity
Up until a few years ago, consumers had few choices when it came to long term care insurance (LTCi).
Traditional policies that provided a certain amount monetary reimbursement were the norm. Policies could be designed to cover expenses for a few months or much longer period of time – even providing benefits for the insured’s lifetime.
For example, consumers could purchase coverage that would provide $100 a day in benefits for a period of three years. When calculated, the $100 daily benefit multiplied by 365 days in a year for 3 years would create a $109,500 “pool of money” available for care.
This pool of money would pay for care in a nursing home, assisted living facility, adult day care, or in the personal residence of the policyholder once certain criteria had been met. In some cases, these funds could be used to reimburse care provided by a family member.
When the pool of money was depleted, the traditional policy would provide no more benefits. If the policy was never used however, the owner would lose the investment of his or her premium payments. Thus, some seniors opted not to purchase these policies, deciding instead to rely on their families or current savings in the event that care became necessary.
Return Of Premium Insurance Rider
With the cost of health care rising rapidly, and a single day in a nursing home costing $175 or more in most major cities, self insuring is a risky proposition. Relying on family is an alternative, but not necessarily a viable one. Unfortunately, most families do not have the time, funds, or ability to provide around the clock care to a loved one.
The insurance industry realized that consumer needs were not always being met with long term care policies. While traditional policies were satisfactory for some, many seniors wanted more guarantees in the event their policy was never used.
Thus, these traditional policies added a “return of premium” rider. If the policy was not used over a set period of time, say 10 years, then the insurance company would return a portion (if not all) of the premiums to the policy owner or a family member. This, like any other rider, came at an additional expense to the purchaser.
Long Term Care Insurance Hybrid Policies
In response to customer and agent demand, insurance companies have designed what can be best described as hybrid or linked policies. These policies combine the benefits of an annuity or life insurance policy with a traditional long term care contract.
With hybrid policies, the consumer has the guarantee of long term care benefits, but if no care is needed, the contracts all offer the promise of monetary benefits to the insured and his or her beneficiaries.
Hybrid Life Insurance Policies for LTCi
Hybrid life policies come on a few different shapes and sizes. One policy links long term care to a single premium life insurance policy. With this plan, the insured deposits a desired one-time premium into a policy. Depending on the age, gender and health of the client, an immediate pool of money is created for long term care. At the same time, an immediate death benefit is created by the life insurance contract.
Take, for example, a healthy 65 year old non-smoking woman with $175,000 in liquid assets. If she deposits $50,000 into the single premium hybrid life account, approximately $87,000 in long term care benefits would be created immediately. There would also be a death benefit to her beneficiaries of approximately $87,000 created from the life insurance component of this account.
At an additional on time cost, this same woman can select a benefit rider that would provide approximately $260,000 in long term care benefits as oppose to the original $87,000. She would also have access to her original $50,000 investment should the funds be needed elsewhere.
In this example, she receives guarantees on her investment as well as protection from the high costs associated with a nursing home stay. In addition, she would still have $125,000 in assets at her disposal that could be used for a traditional or long term care annuity.
There are several types of hybrid life plans; this is but one example. Some allow for joint ownership while others must be purchased individually. Working with an independent agency like ours, consumers can compare several variations of these linked products.
Annuity Hybrid Long Term Care Accounts
Another example of combination type plans links long term care benefits to a single premium deferred annuity. This product begins as an annuity with either a lump sum single premium deposit. If no care is needed, the annuity gains interest like any other fixed annuity and is available for the insured’s financial needs.
However, if the owner/annuitant needs care in a nursing home or elsewhere, a formula will be used to determine the monthly benefit amount available. Continuing on the example used earlier, a healthy 65 year old woman who deposited $150,000 into this account would have the advantages of tax-deferred, safe and insured growth in the annuity and approximately $4,700 a month in long term care benefits for 36 months.
At an additional one-time cost, a benefit rider can be added to the policy providing a $4,700 monthly benefit for her lifetime. Concerning these types of policies, the additional benefit rider is usually a wise purchase in order to obtain maximum guarantees.
Hybrid Long Term Care Annuity Multiplier
The newest addition to the hybrid marketplace is another variation of the long term care annuity. This product also functions exactly like a fixed annuity, but has a long term care multiplier built into the policy.
There is no premium rider attached to this medically underwritten annuity policy. Instead, a portion of the internal return in the contract is used to pay for the long term care benefit. Long term care coverage is calculated based on the amount of coverage selected when the policy is purchased.
The insurance company offers a payout of 200% or 300% of the aggregate policy value over two or three years after the annuity account value is depleted. For example, a policyholder with a $100,000 annuity who had selected and aggregate benefit limit of 300% and a two year benefit factor would have an additional $200,000 available for long term care expenses after the initial $100,000 policy value was depleted.
The policy owner would spend down the $100,000 annuity value over a two year period and then receive the additional $200,000 over a four year period or longer. In this example the contract pays $50,000 a year for a minimum of six years, but care will last longer if less than the $50,000 benefit is needed each year. Again, if long term care is never needed the annuity value would be paid out lump sum to any named beneficiary.
These scenarios are only basic examples of how hybrid policies work. The coverage will be different from person to person depending on age, health, gender, premiums and benefits requested. In order to get an accurate proposal, an illustration would be required. We can help you compare illustrations from several carriers.
These innovative products can meet consumer demands and provide more guarantees by combining traditional long term care insurance with the advantages of life insurance or annuity policies. Thus, consumers who utilize hybrid policies can avoid self-insuring against catastrophic long term care related expenses while still providing living benefits to themselves and a legacy to their heirs
Long Term Care Insurance Providers
We offer traditional long term care coverage from Allianz Life, Genworth, John Hancock, Lincoln Financial Group, Mass Mutual, Mutual Of Omaha, Prudential, and others.
We work with American Equity, Genworth, Old Mutual, One America, Money Guard, and Mutual of Omaha to provide hybrid long term care policies.
Category: Articles, Long Term Care, Retirement Planning, Wealth Transfer
In my numerous meetings with retirees, I have met many who live very comfortably in their golden years. Foremost, they have conservatively invested nest eggs typically in annuities and brokerage accounts. They also possess sizeable deposits at the bank including certificates of deposit, savings and checking accounts. This generation experienced the tribulations of The Great Depression and they understand the importance of saving their money.
Their most important assets, however, may not be invested in a brokerage account or at the local bank. The monthly income they receive from their pensions and their regular Social Security payments, when combined, pay most if not all of their living expenses. This recurring income operates as their primary asset allowing annuity, brokerage and bank deposits to grow undisturbed for future use. In this way, the income this generation receives provides significant and immediate financial stability.
It makes sense that today’s seniors would be able to accumulate a sizable nest egg as well as considerable bank deposits. Their monthly income usually more than covers monthly expenses allowing their existing investments to accumulate. Thus, the main concern for retirees is usually their health and long term care related expenses. That issue is easily solved with the purchase of a long term care policy. With an adequate monthly income and long term care health insurance, this prepared group of seniors can rest easy.
From Where Will You Receive Regular Income?
But what if you did not receive a Social Security payment? And what if you had no pension set up through work? Remember, your 401(k) is not a pension plan. That 401(k) or 403(b) plan is the same plan that seniors today have turned into their nest egg, not their retirement income. If you had no regular monthly income, how long would your nest egg last you?
These are the dilemmas facing many younger workers today. Company pensions have been frozen in many cases and have altogether disappeared in others. In an effort to cut costs, some of the largest employers in America have chosen to discontinue offering pension plans to their employees. Additionally, the Social Security Trustees forecast that this federal program will begin running a deficit in 2017. To make matters worse, the Social Security Trust Fund is only projected to be solvent until the year 2041.
It is safe to assume that you know whether or not you have a pension program at work. It is very difficult, on the other hand, to predict what might happen with Social Security. Depending on government surpluses and deficits or Congressional intervention, the program may or may not live up to its promises. Based on what we know today, younger generations counting on Social Security to shore up their retirement income may be in for an unpleasant surprise.
You Must Plan for Your Own Retirement
What should a concerned worker do? The bottom line is this: you will need to make arrangements for your own retirement. The days of the federal government and a large employer sponsored pension taking care of you are quickly fading away. If you are self-employed, you probably came to this realization some time ago.
I have been encouraging younger wage earners to start their own pension savings plans. And, yes, it is a good idea – even if you are contributing to some kind of traditional retirement plan like an I.R.A or a 401(k). An easy and very safe way to accomplish this is to set up a non-qualified annuity account. Contributions can be done systematically or sporadically based on your personal situation.
Why Should You Invest in an Annuity?
Fixed and indexed annuities are guaranteed financial instruments offered by insurance companies. They work very much like a savings account insofar as they earn interest, but do not lose value based on equity market conditions. If you select a non-qualified annuity, there are no restrictions on the amount you may deposit, but your deposits are not tax deductible like a traditional retirement account. On the other hand, these deposits will grow tax deferred until a later date, which allows you to enjoy the benefits of compound interest.
Once age 59 1/2 is reached, you can begin to withdrawal your funds with no penalties from the IRS. Unlike most retirement accounts, with a non-qualified annuity you are not forced to withdrawal a portion of your funds at 70 1/2. This way, you stay in control of how and when you withdraw your funds.
Annuity Pension Benefits – Taxes and Creditor Protection
The main benefit of an annuity is that it produces a guaranteed systematic payment. If that sounds like Social Security or a pension plan, that’s because they are all quite similar. Once you have accumulated your principal, you can turn those funds into a guaranteed stream of income for your lifetime. However, unlike Social Security and many pension plans you may elect a beneficiary to receive your payments should you pass away prematurely.
An annuity that has been turned into a stream of income carries additional benefits. An annuitization will spread out the taxable income over several years. Your systematic payment would be part principal and part taxable interest.
In this scenario, the taxable income is not automatically withdrawn first and the principal second. The principal and interest are withdrawn simultaneously. The monthly portion which is not taxable is referred to as the exclusion ratio. To summarize this point – your contributions are never taxed when withdrawn from a non-qualified annuity, but the interest gain would be. If the account is annuitized, then the taxable interest will be distributed evenly in each payment, not in a lump sum.
Furthermore, in many states, the payment to the owner is protected from creditors. Once the annuity principal has been annuitized, it is very difficult for creditors to attach to the monthly payments. As such, if you are involved in unfortunate legal proceedings in the future, you can know that you will have guaranteed income still available to you.
In summary, a non-qualified, fixed annuity can be an extremely valuable product in retirement. You can always wait until you are retired to establish the annuity principal with a lump sum contribution, but it can be less stressful to contribute a little each year. A guaranteed income stream will allow you, like today’s seniors, to worry less about your income and enjoy your retirement years.
Category: Annuities, Articles
Interest rates remain at historic lows. Conservative investors who needed guaranteed income and preservation of principal are in a bind. In many cases, returns at the bank are below one percent, but fixed annuity accounts are providing much better yields. Many investors are purchasing fixed annuities rather than bank instruments in order to capture higher returns.
Times may change and the United States economy will hopefully improve significantly. Inflation pressure will grow, and the Federal Reserve should ratchet up interest rates and treasury yields will increase in kind. While much of this is good news, it creates problems for the annuity purchaser from just a few years ago.
Concerns with Older Annuity Accounts
If you invested in a traditional fixed annuity account during these low yielding years, you may find yourself in a dilemma. The problem: many of these accounts have fallen to their guaranteed minimum yields. Currently, they might only offer a paltry return between 2 and 3.5 percent. There are several reasons for this decline.
To begin with, many annuity accounts have a first year bonus that will not be paid in subsequent years. In addition, these accounts often provide a floating rate of return. Their returns are not locked in. A floating rate annuity is quick to go down in years where yields are decreasing, but slow to come back up when yields in the treasury market increase. In essence, if you purchased an annuity in the lean years, you may have locked in poor yields for the duration of your account.
There are other issues as well. If your annuity has not reached maturity, you will have to pay surrender penalties if you cash in the account early. In addition, if you purchased a non-qualified annuity account, you may have accumulated tax deferred interest. Should you transfer your annuity to anything another than another annuity account, you could have income tax to pay. Taxes and penalties will quickly lower your account value upon early surrender.
How to Improve Your Fixed Annuity Returns
Rest assured ─ this is not a story of doom and gloom. The fix to this problem is simple. You simply exchange your old annuity for a new account. Yields have increased dramatically over the last three years, and a new account can lock in a much higher annuity rate. Furthermore, it may be a wise decision to lock in a guaranteed fixed annuity rate as oppose to an account with a floating rate of return.
Unless your account is very new, the higher guaranteed yields can more than make up for any surrender penalties your may have. A sizable account can accumulate thousands of additional dollars by making this change. (It is important to note that many economic pundits are already predicting that the Federal Reserve Board will begin to lower rates in 2007. This will most certainly force treasury markets and annuity yields lower for those who have not locked in higher rates.)
Income Taxes on Tax Deferred Interest ─ 1035 Exchange
Additionally, if income taxes are a concern, you should understand that taxes are not due if you transfer your old non-qualified annuity to a new annuity account. This is why owners simply transfer from one annuity to another in what the I.R.S. has deemed a 1035 tax-free exchange. Income taxes will only be due if and when you decide to take out your interest. If yours is a retirement account (also called a qualified account) you can simply perform a rollover. If done properly, (with the help of an experienced agent and/or accountant), a qualified rollover is not a taxable event either.
In summary, no longer do you need to dread your quarterly annuity statements. There are several reputable insurance companies providing very reasonable guaranteed returns. These products will provide you with peace of mind knowing that a market crash cannot diminish your principal or earned interest. Contact us for more information today.
Category: Annuities, Articles
Our annuity clients come to us looking for safety and security. Major stock market corrections, unstable economic conditions, high inflation, bank failures war, and Covid among other concerns are on their minds. There are fewer places now to invest safely.
Brokerage accounts are fluctuating wildly and bonds prices have taken a major hit as interest rates have increased. Unfortunately, many investors were counting on those funds to provide income and stability during retirement. Now they are holding depreciated assets.
Equity Indexed Annuity Account Introduction
Designed to provide a greater return than a traditional fixed annuity, an equity indexed annuity can be a reliable alternative to a brokerage account. Several billion dollars have been deposited into these types of accounts as investors seek safety and the potential for above-average returns.
Investors should have a little background information if they are unfamiliar with annuities. Generally, an annuity functions in the following manner: The investor (usually called the annuitant or owner) agrees to deposit funds with an insurance company for a specified period of time, say 7 years.
The annuity is usually in deferral during that period of time. While in deferral, most annuities will allow for distributions of interest gains, a yearly 10% free withdrawal, and/or the required minimum distributions mandated by the I.R.S. (Many annuities allow for larger distributions if the owner is confined to a nursing home or is terminally ill.)
Another way to distribute annuity dollars is through systematic withdrawals (referred to as an annuitization) and it is based on an agreed-upon schedule, say 5 years, but can be set up for a lifetime.
If the owner decides to withdraw the entire contract as a lump sum before the annuity has matured, then penalties are accessed based on the surrender schedule in the contract. If the investor passes away, the lump sum of the annuity is paid to a beneficiary at passing unless other arrangements have been made.
Fixed Annuities with Indexing Interest Gains
Technically, equity-indexed annuities are characterized as fixed annuities by the various Departments of Insurance around the country. That is to say, at no point does the investor ever own any variable type of security like a stock, bond, or mutual fund within their account. These investments do not fluctuate in value like a variable annuity. Yet, an equity-indexed annuity is not like your typical fixed annuity either.
What makes EIAs different than a traditional fixed annuity is the way interest is credited to the account. Typically, the insurance company will buy an option in a chosen index like the DOW, S&P 500, or the NASDAQ. After a period of time, usually one year, the option contract comes due.
One of two things will then occur. If the chosen market index has advanced, the option is cashed in and interest is credited to the annuity principal. Conversely, if the market has gone down, the option expires and no interest is credited to the account for that year.
In practice, the annuity either gains or maintains value each year, but the investment cannot lose value due to negative market fluctuations. In this way, the investor is only risking their interest gains in any given year, but in no way is s/he exposing their principal or gains from years past to any downside risk.
It is also important to note that all EIAs have a minimum guarantee each year. For example, this guarantee might state that if the market declines every year over the life of the annuity, the insurance company will guarantee an interest payment of 1% on 90% of the premium deposited for example. However, it is practically unheard of for this safety feature to kick in as rates or returns normally far surpass these guarantees.
Investors should also know that most equity-indexed annuities have a fixed interest account as an additional investment option. When interest rates are high and the stock market is in decline, the fixed account might be used to credit interest to the annuity principal. In this high rate environment, some one-year fixed accounts are paying over 6% for the first year.
In practice, the owner can change their investment allocations each year between the indexing and fixed options provided by their chosen policy. Owners are not required to choose one account and allocate all of their funds to it each year or for the life of the annuity. Many of our clients allocate their principal to several different accounts within the same fixed-indexed annuity in order to hedge their positions.
Indexed Annuity History and Performance
What kind of gains might you experience investing in fixed-indexed annuities? You can compare a few of our best indexed annuity rates, caps and returns here. Historically many of these policies have averaged returns of 7% or better. In years when the broader markets have performed well, so have EIAs. Caps, spreads and participation rates are at historical highs. Some participation rates are above 500%!
It is not uncommon for investors to capture interest gains of 10-20% or more during bull market years. Indexed annuities, however, show some of their most crucial value in bear market conditions. EIAs do not lose principal or past gains when the market goes down. Few investments offer that guarantee.
These facts may explain the recent popularity of EIAs, especially among retirees looking to preserve a lifetime’s worth of hard work. With the market advancing and declining so rapidly, many consumers are looking for safety and security without having to sacrifice reasonable interest gains.
Granted, indexed annuities will not return 50% in one year, like a fortunate stock pick might, but the peace of mind investors gain knowing their investment cannot decline has many placing a portion of their retirement funds into these safe and reliable accounts.
Contact A Licensed Broker
At Hyers & Associates, we’ve been working with indexed annuity policies for over 25 years. Our independence allows us to present all options to our clients. Whether you’re looking for a short term 5 year policy designed for growth or a longer term indexed account with with an income rider, we can help. Contact us to today to compare the options that meet your investment needs.
Category: Annuities, Articles, Retirement Planning
The S&P 500 – January’s first trading day in 2007: 1268.80
Many investors entered 2007 with positive expectations for the year ahead. In fact, a substantial number of large cap companies reported double digit income growth in the first quarter of the year. Pundits immediately chimed in with rosy prophecies of continued expansion.
Here’s an example:
The S&P 500 reaches a high point on May 5, 2007: 1325.76
Around that point in time, Ken Shea, Managing Director of Standard & Poor’s Equity Research Services stated, “…it’s possible that the momentum of the economy and first-quarter earnings could carry over into the second quarter…”
“…Given the robust earnings across a broad range of sectors and the low relative price-to-earnings ratio on the S&P 500, we’re bullish on the S&P 500 and believe there’s an opportunity for the index to produce an 11% total return in 2007…”
Since that day, the S&P 500 index has dropped by more than 7.73% in about one month of trading. Mr. Shea was not the only one mistaken. Many investors and so-called experts made the same judgment call and emotionally poured money into what they were hoping was a “hot market.” Today, we are hearing an altogether different story.
S&P 500 value on June 13, 2007: 1223.24
From Bloomberg.com
S&P 500 Index Futures Fall on Producer Prices
“The figures raised speculation the Federal Reserve will continue lifting interest rates to curb inflation, even as the economic expansion decelerates. Producer prices, excluding food and energy, came in higher than estimates.”
Did our world economic outlook change that much from May 5, 2007 to June 13, 2007? That’s less than 26 trading days! The answer is NO! All the pressures mentioned today were already bearing down on our economy one month ago. The key is to understand the source. Remember, market makers and promoters primarily make their money when they help investors BUY and SELL securities.
Over the last few weeks you can almost hear them yelling, “BUY! BUY! BUY!” only to be followed with “SELL! SELL! SELL!” a few days later.
Does an investor really win? Now overlay this environment on a retirement account that represents a lifetime of saving. This money MUST last a lifetime.
Over the long haul, traditional fixed and fixed indexed annuities have proven to be a great choice for safety minded people who want to sleep at night knowing their money is NOT losing value.
Contributed by: Unkefer and Associates
Category: Annuities, Articles, Third Party
The newest addition to the LTC marketplace is the long term care hybrid annuity account. This product functions exactly like a fixed annuity, but it has a long term care multiplier built into the policy.
There is no premium rider associated with this medically underwritten annuity policy. Put another way, there is no annual cost to the insured unless funded over a finite period of years. Most consumers fund their policy with a single premium, but not all.
Understanding Hybrid Annuity Accounts
A portion of the internal return in the fixed interest contract is used to pay for the long term care benefit rider. Total long term care benefit payouts are calculated based on the amount of premium deposited into the policy. The larger the deposit, the more leverage benefit that is purchased.
Hybrid annuities will declare a fixed interest rate every year – say 3% for example. The interest rate could be higher or lower depending on economic conditions during the lifetime of the policy. There will always be a minimum guaranteed rate which the policy cannot fall below – say 2% for example.
If the annuity is yielding 3%, then .60% might be used to pay for the long term care insurance benefit rider each year. Thus, the account would grow by 2.40% in this example. (It is understood that 2.40% may not keep up with medical inflation so most hybrid carriers also offer additional inflation protection for purchase. Inflation protection can also be purchased with a lump sum.)
Leverage Dollars for Long Term Care Expenses
Once the annuity has been funded, the underwriting insurance company will offer a leveraged payout of the initial premium. For example, a policyholder who invested a $100,000 single premium into a hybrid annuity that is leveraged 3x over would have purchased $300,000 in future benefits.
It is important to note that many carriers have a waiting period (usually one year) before the policy could be accessed for LTC benefits – thus, like all things insurance it is wise to plan ahead.
Additionally, the LTC benefits cannot be taken out over one or two years. Hybrid annuity providers usually require that the funds be taken out over a minimum number of years. In other cases, only a certain percentage of the leveraged policy value will be available each month.
Using the example of the $300,000 leveraged policy, if the minimum distribution length was 6 years, then $50,000 would be available each year for LTC benefits. However, this number is subject to change as the policy grows by the declared interest rate each year and also if additional inflation protection was purchased.
Funding a Long Term Care Annuity
There are only a couple of insurance companies offering long term care annuity policies at present and not all plans are available in all states. Some policies will allow for joint ownership while others may require individual ownership.
Hybrid annuities must be purchased with after tax, non-qualified funds or with the proceeds from another non-qualified annuity. The cash value of a life insurance policy can also be used in some cases. Most insurance companies will not accept qualified rollovers (IRA, 401k) as these accounts usually require future distributions or RMDs.
Occurring at 70 1/2, RMDs can upset the balance of the annuity and the long term care proceeds. Additionally, the proceeds will still be taxable upon withdrawal whether they were used for LTC purposes or not. Qualified money does not work well for you or the IRS with hybrid plans.
Advantages of a Linked Insurance Policy
The main advantage of a hybrid account whether it’s an annuity or a hybrid life insurance policy is the insured can maintain control of their invested dollars. With traditional LTC policies, premiums might be spent for several years with no benefit to the insured if extended care is never needed.
With a hybrid plan, however, the policy has value to the insured for withdraws, loans and/or if it is simply cashed out to be invested elsewhere. If none of the above occur, then the policy can be willed to a beneficiary.
In this way, a small amount of interest has been lost to pay for the LTC benefits, but the accumulated value of the policy will belong to a spouse, children, or any other named beneficiary.
Request Quotes and Information
Hyers and Associates, Inc. is an independent insurance agency specializing in long term care and annuity policies. We can help you compare and contrast several linked and hybrid accounts in order to maximize leverage and benefits.
Category: Annuities, Articles, Long Term Care Insurance, Retirement Planning
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