THE ANNUITY RESOURCE CENTER

Let’s be honest, annuities aren’t simple financial products. If you don’t understand how they work, you’re not alone. In fact, less than half of Americans understand them at all. That’s why our goal at Retirement HQ isn’t to sell you on annuities, it’s to demystify them so you can decide if they’re right for you. In our years of experience advising clients about how annuities fit into their retirement plan, there are few questions we haven’t been asked. With that in mind, we compiled our Annuity Resource Center, where you can find answers to some of the most common annuity questions, covering everything from beneficiary benefits to variable interest rates.

 

Click "Read More" on the questions below to view the full answer. If you want more in-depth knowledge, you can connect with one of our financial experts to discuss how an annuity best fits into your retirement plan.

 

Where does the money go when I invest my retirement savings in an annuity?

i-money-magnifyWhen you purchase a fixed annuity, you enter into a contract with an insurance company in which you pay the company a lump sum or a series of payments in exchange for income payments either for life or for a set period.

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What are the tax implications of annuity distributions?

Like most other financial vehicles, distributions from your annuity contract will have tax implications. Determining exactly what those implications are depends on factors such as how you purchased your annuity and when you’re taking the distributions.

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When I die, what will happen to my annuity contract?

i-moneySince annuity contracts come in many flavors, the details of your specific annuity contract will determine what amount (if any) is payable at death. But there are some general guidelines we can provide.

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Do different annuities have different rates?

The answer to this question will very much depend on the type of annuity we’re discussing. The amount and method of interest crediting will be different for a traditional fixed annuity vs. a fixed-index annuity vs. a variable annuity. Here is how this typically works:

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How old do I have to be to purchase an annuity with maximum retirement coverage?

i-piggybankAnnuities can be purchased at almost any age. That said, most people associate annuities with retirement age because one of their primary purposes is to accumulate funds leading into retirement and to create an income stream during retirement through the distribution of those funds.

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How do I purchase an annuity?

If you’re thinking about buying an annuity, the best thing to do is to first get in touch with an insurance professional who understands annuities and the specific feature, terms and conditions that each product may offer. Annuities fall into one of three categories: fixed annuities, fixed-index annuities, or variable annuities.

Each of the three will have different profiles when it comes to risk, expected return, cost and liquidity. Annuities also can be deferred, which means they can be used to accumulate funds for eventual use without paying taxes on any interest or earnings until they are withdrawn,1 or immediate, which means a lump sum is immediately converted into a payment stream, either for a fixed period or for life.

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What are the fees for an annuity?

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The cost of owning an annuity will vary depending on the type of contract you select. For example, fixed annuity fees are not explicitly outlined or disclosed, rather, they are built into the product’s pricing and are reflected in the interest rate credited, or eventual income payout. So, for example, if you buy a fixed annuity, which offers a 2% annual interest rate for five years, that includes all other expenses as well, such as costs for the insurer or sales commissions to the selling agent. If you are comfortable with the interest rate, interest rate time period and the payout amount you will receive, the internal details of the fee structure may not matter all that much.

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What are the average rates of return for an annuity?

The interest rate your annuity will earn will largely depend on the type of annuity you buy. If you purchase a traditional fixed annuity, your interest rate will be declared in advance, leaving no surprise about how much interest you’ll get and when. For example, if you purchase a fixed annuity with a $50,000 premium with a 2% interest rate, you'll receive $5,000 of total interest and have $55,000 after 5 years. The interest crediting is often level, but sometimes it can be higher in earlier years and lower in subsequent years of the contract, depending on the product and insurance company you choose.

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Can I roll my 401(k) into an annuity tax-deferred?

The short answer to this question is “Yes.” You are permitted to do a 401(k) rollover into a qualified annuity, which is an annuity designed to fund retirement. Any qualified retirement account can be rolled into something called an IRA annuity which can be purchased from your insurance company. Since contributions are made with pre-tax dollars, one of the best parts of doing this is your employer can do the rollover directly without having to deal with the mandatory tax withholding of 20% if you were to surrender the 401(k) and receive the funds directly.

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What is the average annual interest rate on a fixed-index annuity?

There’s no truly simple answer to the average interest rate on a fixed-index annuity because these annuities generally base their interest credits on the performance of an external market index and interest will fluctuate from year to year. Your own interest rate on a fixed-indexed annuity will be dependent on a lot of different factors, aside from simply how the index performs over a given year. Some to consider include:

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Are annuity surrender charges tax deductible?

Let’s say you have an annuity, and for one reason or another, you need to surrender it. When you surrender it, you’ll be given a check for the cash value, minus the surrender charge. That surrender charge could be significant if you cash out the annuity early, during the surrender charge period. Because annuities are long-term products designed to help you save for retirement, surrender periods are generally tiered with the highest fees occurring in the earlier years. It’s in your best interest to avoid winding up in a surrender situation in the first place. These fees can be quite high, with some costing as much as 9% of the balance if surrendered in the first few years.

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Do you have to pay taxes on an annuity death benefit?

Whether you have to pay taxes on an annuity death benefit will depend on what the death benefit is and the type of annuity originally purchased. To start, it depends on if you’re dealing with a qualified or non-qualified annuity. In a qualified annuity, the owner originally was able to put the money away on a pre-tax basis, so taxes will be due as soon as money is withdrawn at an ordinary income rate.

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What’s the difference between the present and future value of an annuity?

The easiest way to explain the present and future value of an annuity is that the present value is what you pay, and the future value is what you get. The present value is how much you need to pay in to reach a desired future income. So the present value represents your initial premium payment (or payments), while the future value is how much those payments will equal in the future.

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Should I purchase an annuity from a captive or independent insurance agent?

What kind of insurance agent you work with should depend on a number of factors, one of which is how much you know about the annuity you want to purchase. If you know exactly what annuity you want, then a captive insurance agent, or one who sells only a specific company’s products, might be a good option. However, if you’re unsure about what kind of annuity is appropriate for your retirement plan and are considering a lot of insurance companies’ products, an independent agent may be a better choice because he or she can usually offer a wider range of products for your consideration.

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How does the cap on your fixed-indexed annuity impact potential interest?

Many fixed-index annuity (FIA) contracts set limits on the amount of interest the annuity will earn, in the form of a cap, spread, or participation rate. All of these features will limit the maximum interest rate you can earn, based on a specified stock or index fund, in a specified period of time based on your contract’s terms. You’re never going to find a fixed-indexed annuity that provides you with growth opportunities that match the gains in the index point-for-percentage point because FIAs are fixed insurance products and do not invest in the market themselves. Instead, if the index reaches or exceeds the capped level, that cap is used to calculate your interest. It’s important to note that, although an external market index or indexes may affect your contract values, the contract does not directly participate in any stock, equity, or bond investments, and you are not buying shares of any stock or index fund.

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At what point does the beneficiary to an annuity acquire rights in the contract?

For the most part, the beneficiary status of an annuity contract kicks in when the owner of the contract dies. Sometimes, though, that annuity is held in an IRA, which could impact the beneficiary status. There is also the possibility that control of the annuity might not be passed on. Instead, the annuitant might simply get a lump sum payout.

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How long is the accumulation period for immediate annuities?

Immediate annuities don’t have accumulation periods because the money never “accumulates.” Instead, you pay a lump sum premium to the insurance company, and your income payments start immediately. This often confuses people because they get the benefit of receiving payments based on a growth of interest -- without having to wait.

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For whom is joint annuity often reserved?

Generally, joint annuities are owned by a husband and wife. This is in a true joint annuity situation, in which both owners have equal control over the annuity, and they are also usually listed as joint annuitants on the contract. What happens is the husband and wife own the annuity jointly, and survivorship rights are passed on solely to the surviving spouse when one spouse passes away. This allows the annuity to continue as-is or be added to the spouse’s account. In a joint annuity, the contract, in essence, converts to a single annuity when one of the joint owners and annuitants dies.

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For most fixed-indexed annuities, what is the specified floor?

A “floor” in any fixed index-based financial product is the absolute maximum you will lose in the event of a significant drop in the index. In a fixed-index annuity, this floor is referred to as a guaranteed minimum interest rate, which is usually an annual interest rate set at 0% to 3%. So, your floor, or guarantee, in your annuity would be your annuity value plus the minimum annual interest rate. Even in the case of significant index losses, that would still be your annuity’s cash value and it would never drop below that amount due to market risk, although you could lose money due to optional annual rider fees, or due to surrender charges on early withdrawals.

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