Solutions 2 Annuities

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Annuities…a word that many use one single brush stroke to identify. But the reality is that there are many types of annuities and many can be either misrepresented or poorly sold. Leading to many incorrect opinions and concerns.  Having studied annuities for almost 20 years, we know the minor to major differences and can identify the appropriate time to use them.  One thing has been a constant for us; our clients have all been completely satisfied with our recommendations because we carefully consider the many factors involved in choosing any annuity.

 

Let us take a look at some different types of annuities:

Fixed Annuity

As the name implies, a Fixed Annuity offers a “fixed” rate. Under the name of a Fixed Annuity there are two specific ways the fixed or declared rate are delivered.

The most popular way is the interest rate is guaranteed every year of the term selected. When the rate is guaranteed, it is called a Multi-Year Guaranteed Annuity or MYGA.  The term typically ranges from 3 – 10 years.  Often times, the longer the term, the higher the rate.  With a MYGA, the owner can feel the comfort of knowing exactly what they make each year.

The traditional choice for many years was a Traditional Fixed Annuity. The rate will often be guaranteed for one year and will most often include a bonus for the first year. After year one, a new rate is declared each year thereafter.  The contract is required to include a minimum rate the carrier can offer, typically between 1 – 3%.  During lower rate environments, the minimum would typically be 1% with higher rate environments possibly offering a minimum guarantee of up to 3%.  The Traditional Fixed Annuity may or may not renew at the base rate, but cannot go any lower than the minimum guaranteed rate included in the contract at the time of purchase.

An advantage of a Fixed Annuity is having dependable performance for stability in your retirement funds. In addition, it may offer a specified amount of liquidity during the surrender charge period via penalty free withdrawals and waivers.  The Fixed Annuity gives tremendous strength by providing the peace of mind that you cannot lose your funds in the market.

Fixed Index Annuity

The Fixed Index Annuity is similar to a Fixed Annuity in regard to safety, but instead of a fixed rate, it allows you to participate in the upside of the market while protecting your funds from any market loss. The product was originally named Equity Index Annuity, but because there is no equity exposure, most insurance companies now call them a Fixed Index Annuity.

This annuity guarantees you will not receive a negative return, while allowing you to participate in the “Upside of the Market” without participating in the “Downside of the Market”. The most popular Index/Indices used is the S&P 500.  Due to their success and the insurance carrier’s creative abilities, we are now seeing several other Indexes being used, but the principal is the same.  The upside participation you receive may involve a cap, spread, and/or participation rate.  Most popular strategies credit interest and reset annually.  Once any interest is credited, you cannot lose that interest due to a market downturn.

Single Premium Immediate Annuity

Most definitions of Fixed Annuities would include the definition of the Single Premium Immediate Annuity because annuities were originally created to at some point provide a stream of income to the insured. And while the stream of income portion holds true today for an Immediate Annuity or Deferred Income Annuity, it is best to use the original descriptions for one of these two and not the Fixed or Fixed Index Annuity.

An Immediate Annuity is purchased with a Single Premium to provide an income stream beginning within the first 12 months for one of the following payouts. These can pay out on single life or joint life expectancies.  There are times that leveraging a portion of your assets can be advantageous, but several factors need to be considered prior to using this as a solution.

Variable Annuity

We do not offer variable annuities, but want to provide you some basic information…

Variable annuities were introduced in the 1950’s as an alternative to fixed annuities. Variable annuities allow investors to invest in a dozen or more professionally managed subaccounts consisting of various asset classes, including stocks, bonds and money market funds. This gives investors the opportunity to earn higher rates of return, which can increase the amount of capital they can accumulate and provide a variable income stream to potentially outpace inflation. However, investors assume the risk of their subaccounts not outperforming the guaranteed return of a fixed annuity, which can result in less capital accumulation and a smaller income stream.

Investors should carefully read the prospectus for a full understanding of the expenses and risks. Between the investment management fees, mortality fees, administrative fees and charges for any riders, the expenses for a variable annuity can quickly add up, which can adversely affect returns over the long term.