After accumulating money in an annuity it is not mandatory that the annuitant exercise the annuitization option and relinquish control of his or her cash value and enter into the annuity distribution phase, the annuitant can simply cash out of his or her annuity.

The Accumulation Phase

Features

• During the accumulation phase, the fund grows tax deferred, it does not grow tax free. If the annuity was not purchased as part of a qualified retirement program such as an IRA, 401(k), TSA, or 457 plan, income taxes are paid on the earnings when money is ultimately paid out. If the annuity is part of a qualified plan the entire fund is subject to income taxes as it is withdrawn.
• Surrender charges for early withdrawals. Most offer partial withdrawals free of surrender charges.
• If you withdraw money from your annuity before age 59 ½ it is called a “premature distribution” and is subject to an additional 10% IRS penalty.
• If a premature death should occur, the accumulated funds within the annuity are transferred to the named beneficiary, avoiding probate costs.
• Annuities can vary by payment mode and are available as “single premium” (purchased with one-time payment) or “flexible premium” (purchased with recurring periodic payments). They also vary by timing of the annuity income and may be available as a “deferred annuity” (which means that annuity income payments are deferred until later) or as an “immediate annuity” (which means that annuity income starts immediately).
• For fixed and equity indexed annuities there is safety of principal and earnings.
• Variable products are subject to mortality and expense charges and administrative fees not typically found with other investments.

Types

• Fixed annuities
• Variable annuities
• Equity Indexed annuities

Fixed Annuities

In a fixed annuity, the insurance carrier:

• Declares a current rate of interest for a specified time period. Once the time expires the company will set a new rate which may be higher or lower than the original rate.
• Guarantees a minimum interest rate of return which is specified in the contract, and at no time may the current or renewal interest rate fall below it.
• Guarantees the principal.

Variable Annuities

A variable annuity has two types of accounts:

Fixed Accounts

In a fixed account, principal and interest are guaranteed by the insurance company. Interest rates are usually guaranteed for one year but can be longer.

Variable Accounts

• In a variable account, the annuity owner bears the investment risk. Policy values vary directly with market performance and may result in a loss of principal and prior earnings. Earnings are tied directly to the performance of various underlying investment vehicles which are available within the variable annuity and are selected by the owner.
• Variable annuities offer a guarantee that in the event of death the beneficiary will receive at least all the premiums paid less any withdrawals made no matter what the value of the account.

This means if the account fund is valued less than the original investment, the beneficiary will receive the original investment.

* Equity Indexed Annuities

An Equity-Indexed Annuity (EIA) has interest rates that are linked to growth in the equity market as measured by an index such as the S&P 500. The EIA owner enjoys the upside potential of equities but is not exposed to downside risk. Subject to fixed minimum guarantees, the value of an EIA can only increase due to market growth – it will never decline due to market movement. There are many variations in product design. No two of the EIAs are exactly alike, and some are very different from each other. However, all the various types fall into three general categories: annual high-water mark with look-back. The following is a simple definition of each. Please call us if you would like to know more.

Annual Reset – Also known as the annual ratchet design, the annual reset design resets the starting index point annually. It also credits index increases (interest) annually and compounds annually.

Point-to-Point – The point-to-point design measures the change in the index from the start of the term to the end of the term.

Annual High-Water Mark with Look-Back – The annual high-water mark with look-back can be viewed as a variation on the point-to-point design, except that it measures the index from the start of the term to the highest anniversary value over the term.

* Some annuities allow the insurance company to change participation rates, cap rates or spead/asset/margin fees either annual or at the start of the next contract term. If an insurance company subsequently lowers the participation rate or cap rate or increases the fees, this could adversely affect an investor’s return. Therefore, a prospective investor must carefully review his or her contract in order to examine these issues.

Withdrawal

• Withdrawals may be made at any time. However, the withdrawal may be subject surrender charges and if done before age 59 ½ there will be a 10% IRS penalty. Some contracts allow an annual 10% withdrawal free of surrender charges.
• The owner may pre-authorize a systematic periodic withdrawal plan. The owner of the contract instructs the company to withdraw a percentage or a level dollar amount from the contract on a monthly, quarterly, semiannual, or annual basis.

The Distribution Phase

As part of the distribution phase, the owner has two options, he or she can withdraw money (either in a lump sum or elect a systematic withdrawal plan) or annuitize (purchase an annuity pay out plan).

Annuitization

When the owner annuitizes the funds he or she purchases an annuity pay out plan. In a Fixed and in an Equity Indexed Annuity the owner purchases a monthly income that will be paid to him or her until death. It is a guaranteed income that will not change. In a variable annuity, the owner has an option to do the same or transfer all or part of the contract to one or more of the sub-accounts that are available, and annuitize those funds. The funds that are annuitized in the separate accounts produce an income that will change from month to month based on the performance of the sub-account that the funds are placed in.

Annuity Pay Out Plans

Life Only - Periodic monthly payments to an annuitant for the duration of his or her lifetime and then ceases. It is for a lifetime, the annuitant cannot outlive the payments. The payments are determined at the time of purchase and are based on age and sex.

Life with 10 years certain – Payments will be made for at least ten years, regardless if the annuitant lives for the entire ten years. If the annuitant dies during the ten-year period the remainder of the ten-year payments will be made to a beneficiary. If the annuitant lives longer than ten years he or she will continue to receive payments for his or her lifetime. The guaranteed monthly payments will be less than “life only.”

Life with 20 years certain – Payments will be made for at least twenty years, regardless if the annuitant lives for the entire twenty years. If the annuitant dies during the twenty-year period the remainder of the twenty-year payments will be made to a beneficiary. If the annuitant lives longer than twenty years he or she will continue to receive payments for his or her lifetime. The guaranteed monthly payments will be less than “life only”, and “Life with 10 years certain.”

For more information on Annuities or California Life Insurance, please contact our office today.

Fixed Annuities:

• Provide Guaranteed return
• Provide Tax Deffered Earnings (thus yeilding better return than CD’s)
• Are NOT tied to the stock market
• Do NOT have contribution limits
• Can provide Lifetime income

With the current economic status not only in our nation, but worldwide, many people have found that their retirement accounts are falling short of their expectations. A fixed annuity is a conservative piece of your retirement planning.

To describe the benefits of a fixed annuity, you must first understand the difference between a speculative investment and guaranteed return. A speculative investment, like stocks and mutual funds, has the potential for both loss and gain. While a guaranteed return has only the possibility for gain.

A fixed annuity is a guaranteed return product. It’s very much like a CD (certificate of deposit), except your earnings are tax deferred, therefore, yielding more than most CD’s. On Average, people commit to an annuity investment for 5 to 10 year periods. An annuity can also provide lifetime income so you don’t outlive your retirement. Unlike other retirement programs, you aren’t penalized for living a long life. You may even choose a payout that benefits a spouse or other beneficiary.

Now, more than ever, building and holding onto your retirement savings is critical. With a fixed annuity, the money you invest will always be there when you need it. I like this product because I never have to make a phone call to tell my client that they’ve lost money. In the past two years, many of my clients have called to thank me for this conservative approach, when many of their friends have lost half of their retirement in the stock market. If you have money that you can invest for 5 years or more, this may be the way to go.

For more information on Fixed Annuities, please feel free to call my office at 805-544-8929 and speak with Scott Engle.