What are Annuities? What is an Annuity?
Annuities are contracts between you and an insurance company, under which you make an initial lump-sum payment. This lump-sum payment or deposit or investment or contribution or premium EARNS INTEREST for as long as you hold your Annuity (Premium, is what it is actually called in the contract in most cases).
Annuities have two basic contract designs: One is called an Immediate Annuity and the other is called a Deferred Annuity. Both are called Fixed Annuities.
Immediate Annuities: Immediate Annuities provide a Guaranteed Monthly Income for Life or a Period of Time. The first payment usually begins 30 Days from purchase, but may be delayed up to 12 months. Immediate Annuities are explained in great detail on the Immediate Annuity page (Click Here).
Deferred Annuities: With Deferred Annuities you may delay taking an annuitized Income Indefinitely or NEVER. Deferred Annuities allow for Growth of your initial deposit by Earning Interest each and every year. Withdrawals of Interest can be made and most allow you to withdraw up to 10% of account value each year. Many versions of Deferred Annuities are available today. They are called:
1. Fixed Index Annuities or Index Annuities formally know as Equity Index Annuities
2. Multi-Year Guarantee Rate Annuities also known as CD Type Annuities
3. Traditional Fixed Rate Annuities
Index Annuities: With Index Annuities the Interest you Earn is based on the upside movement of one or multiple stock market indexes. Your Initial investment and any interest earned along the way can NEVER DECLINE. These are 100% Safe and have NO MARKET RISK. They give you the Opportunity to Earn a Higher Return over time than the other Annuities listed above and any Fixed Income type vehicle for that matter. Index Annuities are explained in great detail on the Index Annuity page (Click Here).
Multi-Year Guarantee Rate Annuities also known as CD Type Annuities: With this type of Annuity the Rate is Guaranteed for the FULL Term you select. Terms are available for 2 Years to 10 Years. Generally, the longer the term the Higher the Guaranteed Rate will be. You can employ an effective Laddering Strategy using Annuities by using a 6 Year, 8 Year and a 10 Year.
Traditional Fixed Rate Annuities: This type of Annuity usually Guarantees the Rate for the 1st Year and Rates will be declared each year thereafter. Newer versions will guarantee rates for part of the term. A partial guarantee of 3 years or 5 years. Also versions of this type may pay a BONUS Rate in the 1st year.
Annuities CAN ONLY be Purchased from an Individual or Entity Licensed in insurance as a Producer, Agent or Entity in your State. You CANNOT Buy Annuities from an Un-Licensed Individual or Entity. If they are making Annuities Available for you to Purchase, they are Licensed in Insurance with a Life and/or Annuity authority, NO MATTER HOW THEY TRY TO DISGUISE IT.
The Interest you Earn Compounds Income Tax Deferred. This Tax Deferral can be maintained for your lifetime if you want. You may continue with the initial annuity you purchased or you may transfer to a new annuity after the initial term of the first annuity you purchased and continue the Tax Deferral in that new annuity. This transfer is called a 1035 exchange (Please note: partial 1035 exchanges are also acceptable). With Annuities you have complete control when to pay income taxes on the earned interest. A taxable event only occurs when you take a withdrawal of funds from your annuity and only on the exact amount you take.
Unlike other Tax Favored Accounts (IRA's, 401K's etc., etc.) which have Strict Limits on the contributions you are allowed to make each year, Annuities have NO LIMITS on the amount you can contribute (Contributions are NOT Tax deductible they are TAX DEFERRED). You can contribute $100,000, $500,000, $1,000,000, $5,000,000 or whatever amount you want. Limits may be imposed by a specific Insurance Company on the amount they will accept. However, you would just make contributions to several insurance companies if you intend to contribute multi-millions of dollars into annuities (many use this strategy). The U.S. congress created the Tax Favored Treatment of Annuities back when the Income Tax was first created (In 1913) because Annuities were "the retirement savings vehicle" of that time and prior history. As such the IRS imposes a 10% early withdrawal penalty on interest earnings, if these withdrawals are taken prior to age 59 1/2 (Exceptions do Exist).
Fixed Annuities have no loads, fees or other add on annual charges. 100% of your money earns interest!
Fixed Annuities are NOT Variable Annuities! Variable Annuities are a Securities Product and should NOT be confused with Immediate Annuities, Fixed Rate Annuities and Index Annuities which are all Fixed Annuities.
Variable Annuities are the only "expensive" type of annuity which have total annual Fees of 1.25% to 3%+. Don't be Confused... Fixed Annuities ARE NOT Variable Annuities
Annuities AVOID the Probate Process and all of the Expenses and Costs of Probate (3% to 4% of Probated Estate Value). Any money's in Annuities that Avoid the Probate Process will also maintain complete PRIVACY and they can transfer to your named beneficiaries within weeks not months like a probated estate would.