What is an Annuity?

To put it simply, an annuity is a contract between an individual ( called the annuity owner ) and an insurance company for an interest-bearing policy with guaranteed income options. These income options are payment made from the principal and interest applied within the annuity and can be guaranteed for the lifetime of the individual or for a specific period of time. 

What is a Fixed Annuity?

A Fixed Annuity is one that is based on safe, no risk investments. Therefore, the insurance company can declare a set or “fixed” interest rate and gurantee that rate for a specific period of time. The specified period may be for one year at a time or for a certain number of years, such as 5 years, 7 years or 10 years. When an interest rate is declared and guaranteed for more than one year at a time, it is often referred to as a Multi – Year Guarantee Annuity  or a MYGA.

What is an Equity – Indexed Annuity (Fixed – Indexed Annuity ) or EIA / FIA?

An Equity – Indexed Annuity (Fixed-Indexed Annuity) or EIA/FIA is a fixed annuity.  What makes this type of deferred annuity different is how the gains are credited.  Instead of crediting a company-declared interest rate of say 4, 5 or 6 percent, the gains are linked or indexed directly to the performance of a leading stock market index, such as the Standard & Poor’s 500. Like other fixed annuities, there is a 100% guarantee of principal plus minimum interest (usually around 3 percent). 

An individual cannot lose a penny, as long as he or she stays in the contract for the full contract term.  Unlike other fixed annuities, however, the owner has the potential to make more money if the index goes up.  If the index goes down, the owner does not lose anything and is still guaranteed 100% of principal plus minimum interest.  In an EIA/FIA, there are no sales charges, management fees, expense charges or mortality costs, so 100% of the premium is used to accumulate interest.  Plus, Equity-Indexed Annuities/Fixed-Indexed Annuities provide an incredible opportunity for stock market-like gains with absolutely no risk.

Annuity Advantages

Tax-Deferred Growth

All annuity dollars are able to accumulate interest completely tax deferred.  This means an individual can delay taxation of growth until the money is needed.  Thus annuity owners are able to reduce their current taxes and can control the timing of the taxes in the future.

Triple Compounding

Because annuity owners do not pay current taxes on earnings, they are able to benefit from triple compounding – earning interest on their principal, interest on their interest and interest on the money that normally would be paid in taxes.

Guaranteed Lifetime Income

Annuities can provide the annuitant with a monthly income for as long as he or she lives – guaranteed.  Furthermore, the guaranteed lifetime income can be continued to the beneficiary, or in some cases, a lump sum distribution option is available.  Higher Return (Increased Yield) on Safe Money Historically, annuities have paid higher interest rates than other safe money investments of similar risk, such as money market funds, CDs and Treasury bills, etc.

Reduced Social Security Taxation

Interest earned in annuity accounts is not included to determine an Individual’s modified adjusted gross income, which is used to determine how much of an individual’s Social Security benefits are subject to taxation.  By keeping assets in an annuity instead of another investment such as a CD, an individual can avoid increased taxation of their Social Security benefits.  Guaranteed Safety With annuities, your principal is 100% safe and you are guaranteed to each at least a minimum interest rate.  There is no market risk and your account value is guaranteed to increase.

Avoid Probate

As long as the annuity owner designates a “named” beneficiary other than his or her estate, the beneficiary will receive the annuity dollars without the delay, expense and hassles of probate proceedings.