|
Ten things you should know about buying fixed deferred annuities,
from the National Association of Insurance Commissioners:
1. What is an Annuity?
An annuity is a contract in which an insurance company makes
a series of income payments at regular intervals in return for
a premium or premiums you have paid. Annuities are often bought
for future retirement income. Only an annuity can pay an income
that can be guaranteed to last as long as you live. Your money
grows tax-deferred as long as you leave it in the annuity.
2. Examine Different Kinds of Annuities
The most common types of annuities are: single or multiple
premiums, immediate or deferred and fixed
or variable. For a single premium contract, you pay
the insurance company only one payment, where as you make a
series of payments for a multiple premium. With an immediate
annuity, income payments start no later than one year after
you pay the premium. The income payments from a deferred annuity
often start many years later. Deferred annuities have an accumulation
period, which is the time between when you start paying premiums
and when income payments start. During the accumulation period
of a fixed deferred annuity, your money, less any applicable
charges, earns interest at rates set by the insurance company
or in a way spelled out in the annuity contract. During the
payout period, the amount of each income payment to you is generally
set when the payments start and will not change. During the
accumulation period of a variable annuity, the insurance company
puts your premiums, less any applicable charges, into a separate
account. You decide how the company will invest those premiums,
depending on how much risk you want to take. During the payout
period of a variable annuity, the amount of each income payment
to you may be fixed (set at the beginning) or variable (changing
with the value of the investments in the separate account.
3. Know How Interest Rates are Set
During the accumulation period, your money, less any applicable
charges, earns interest at rates that change from time to time.
Usually, what these rates will be is entirely up to the insurance
company. The current rate is the rate the company decides to
credit to your contract at a particular time. The company will
guarantee it will not change rates for a certain time period.
The minimum guaranteed interest rate is the lowest rate your
annuity will earn. This rate is stated in the contract. Some
annuity contracts apply different interest rates to each premium
you pay or to premiums you pay during different time periods.
Other annuity contracts may have two or more accumulated values
that fund different benefit options. These accumulated values
may use different interest rates. You get only one of the accumulated
values depending on which benefit you choose.
4. Know What Charges May be Subtracted from Your Fixed Deferred
Annuity
Most annuities have charges related to the cost of selling or
servicing it. These charges may be subtracted directly from
the contract value. Ask your agent or company to describe the
charges that apply to your annuity. Some examples of charges,
fees and taxes are surrender or withdrawal charges, free withdrawal,
contract fee, transaction fee, percentage of premium charge
and premium tax.
5. Contract Benefits of Fixed Deferred Annuities
Companies may offer various income payment options. You or another
person that you name may choose the option. If you choose Life
Only, the company pays income for your lifetime. Life Annuity
with Period Certain pays income for as long as you live and
guarantees to make payments for a set number of years even if
you die. If you choose Joint and Survivor, the company pays
income as long as either you or your beneficiary lives. In some
annuity contracts, the company may pay a death benefit to your
beneficiary if you die before the income payments start.
6. Tax Treatment of Annuities
Under current federal law, annuities receive special tax treatment.
Income tax on annuities is deferred, which means you are not
taxed on the interest your money earns while it stays in the
annuity. Tax-deferred accumulation is not the same as tax-free
accumulation. An advantage of tax deferral is that the tax bracket
you are in when you receive annuity income payments may be lower
than the one you are in during the accumulation period. You
will also be earning interest on the amount you would have paid
in taxes during the accumulation period. Most states’
tax laws on annuities follow the federal law. You should consult
a professional tax advisor to discuss your individual tax situation.
7. Take Advantage of the "Free Look" Provision
Many states have laws that give you a set number of days to
look at the annuity contract after you buy it. If you decide
during that time that you do not want the annuity, you can return
the contract and get all your money back. This is often referred
to as a free look or right to return period. The free look period
should be prominently stated in your contract. Be sure to read
your contract carefully during the free look period.
8. Is a Fixed Deferred Annuity Right for You?
You should think about what your goals are for the money you
may put into the annuity. You need to think about how much risk
you are willing to take with the money as well. Ask yourself
the following questions: How much retirement income will you
need in addition to what you will get from Social Security and
pension, will you need that additional income only for yourself
or yourself and others, How long can you leave money in the
annuity and does the annuity let you get money when you need
it.
9. Some Questions Your Agent Should be Able to Answer
A few questions that you should ask your agent are: Is this
a single premium or multiple premium contract, what is the initial
interest rate and how long is it guaranteed, what is the guaranteed
minimum interest rate, can I get a partial withdrawal without
paying surrender or other charges and is there a death benefit.
10. Review Your Contract Carefully
Before you decide to buy an annuity, you should review the contract.
Terms and conditions of each annuity contract will vary. Ask
the agent and company for an explanation of anything you do
not understand. Do this before any free look period ends. Compare
information for similar contracts from several companies. Comparing
products may help you make a better decision. If you have a
specific question or cannot get answers you need from the agent
or company, contact your state insurance department.
|
