By Danielle Scott

 An annuity is an investment contract between an insurance company and a person where a person makes a series of payments or pays a lump sum to the company and at a specified date, the person receives a check periodically for a certain period of time.

 You pay into the annuity by making payments or one lump sum, and then at a later date you receive payments from the company. The money can be received periodically or in a lump sum.  The amount you receive in payments depends on how long you have had the annuity as well as other factors.  Payments can be either received for a certain amount of time, or for life. Beneficiaries may receive any money left in the annuity after the original owner dies, depending on what kind of annuity the person has.

 People looking to invest and save for retirement are people who should invest in annuities. These people are generally ones who have more money and are starting a little bit later in life to save for their retirement.  Usually older people, close to retirement age invest in annuities to have a steady flow of income after retirement.

 Annual premiums are the series of payments a person makes to purchase an annuity  These are usually paid monthly

 Annuities may either be fully or partially taxable  Deferred annuities are tax deferred during the time of growth, but the earnings from this are taxed in total when the money is withdrawn  The payments put into the annuity are not taxed  Annuity owners pay taxes on their annuity payments when they start to get distributions  If money is withdrawn from the annuity, it is completely taxable because the IRS assumes that the earnings come out first

 If a person dies before receiving all of their annuity payments, which is usually what happens with deferred annuities, contributions made by the previous owner will not be taxed  The annuities tax deferred earnings will be taxed as income to the beneficiary

 Depending on what type of annuity you have invested in, you may be eligible for annuity payments as soon as you invest or after a certain period of specified time and at this time you will distributions that are considered taxable income at your current tax rate  All of these things should be stated in the annuity contract and should be discussed with the insurance company before the annuity is opened

 Annuities make money from interest earned on them while they are growing from the payments you make into them  Annuities are investments, which means that you put money into something and the company invests your money  Since companies don’t usually expect people with annuities to withdraw money for a long time period, they are free to invest the money to make a profit  Annuities are a risk, especially if the insurance company closes, but if it does not they can acquire much money in interest

 Annuities are never 100% secure  The amount of security you have on your annuity depends on which kind you have  If you have a fixed annuity, depending on what your state laws are, your money is only insured up to a certain amount  There are other types of annuities that allow some of your money to be invested in separate smaller accounts not insured by the company so that part of your money is not at risk  The insurance company has their own claims- paying ability which holds the safety of the contract provisions

 There are two main types of annuities: immediate annuities and deferred annuities  Immediate annuities allow for payouts of your investment to start right after you make the initial investment  With deferred annuities, money is accumulated and you start receiving payments after a certain period of time

 Under each of the most general type of annuity, there are tons of other types of annuities  Some of these include variable annuities, index annuities, fixed annuities, variable annuities, tax sheltered annuities, tax deferred annuities, savings annuities, income annuities and equity indexed annuities

 “Annuities are not savings accounts. There may be restrictions or substantial charges if you take money out, particularly within the first 7-10 years. Annuities should not be bought for short-term purposes.” rance&L4=Buying+Life+Insurance+and+Annuities+in+Massachusetts&sid=Eoca&b=terminalcontent&f =doi_Consumer_css_life_BuyLifeInsPartOne&csid=Eoca

 Annuities grow in amount without being taxed until the money is withdrawn  The amount of money that you personally put into the annuity is not taxed  The earnings on the annuity are taxed at your regular income rate when it is distributed

 Two main advantages are that they allow a large amount of money to be stored away and be tax deferred  There is also no limit on how much money you can put into your annuity annually, which is particularly good for people who need to save money for retirement quickly  The money you put away gets compounded each year without being taxed  When it comes time for your money to withdrawn, you can either choose to take it all at once or set up a payment plan

 Not all annuities have high fees  Everything really depends on what type of annuity you have and how long you have had it for  Some annuities have a 10% commission fee on them along with withdrawal fees and surrender charges, but some do not have these things  Called direct-sold annuities, these aren't sold by a traditional insurance company, which means no insurance agent is involved to charge a commission

 There are three main fees associated with annuities  Commissions: since annuities are sold by insurance brokers and salespeople, most require a 10% commission fee  Surrender charges: if you decide to take money out early from your annuity, you are oftentimes subject to fees  Variable annuities come with high annual fees attached (annual insurance charges, annual investment management fees, and a variety of insurance rider fees)

 You open an annuity by either going online, to an insurance broker or to a financial advisor.  Online you are required to give a few bits of information, then the company fills in the appropriate form for you and they start processing your annuity. You should really understand what you are buying before you buy online.  When you go to a broker or financial advisor, be sure to research for companies that you trust. The company you choose should be able to provide you with your individual annuity needs. Once you have your company choice, you need to fill out the appropriate forms and then sign the contract. Once that is signed and everything is processed, you have to fund the annuity.

 Fixed-rate annuities allow you to have no control over what your money gets invested into. The insurance company determines what to invest your money in.  Variable annuities allow you to choose what you want to invest in under the sub accounts of the annuity. Your account depends on the success of your investment.

 There are four types of payout options that annuities offer:  Income for a guaranteed time period- you receive a specific payment for a set time period. When you die, someone else receives your payments for the rest of the time period.  Lifetime payments- the payout of the annuity is dependent on your life expectancy and the amount of money invested into the annuity. When you die, any money you may have remaining is gone

 Income for life with a guaranteed period certain benefit- this is a combination of the first two types. This annuity gives you a certain payment for life, but when you die, someone else receives the payments only for a certain period of time, whether or not the full amount of the annuity is paid out.  Joint and survivor annuity- this annuity allows for someone else to receive your annuity payments for life after you die.

 There are several issues with withdrawing the money  Depending on how long you have held the annuity for, you will most likely have to pay a fee of some sort  If you are under 59 ½ you are required to pay a 10% fee for early withdrawal  Also, you will be required to pay a regular income tax on your earnings from the annuity

 A surrender charge is usually required within the first seven years of buying the annuity, being at usually 7% and decreasing one percent every year  Initial surrender charges for some companies reach as high as 20% so it is important that you are sure of the company policies  There are also some companies that allow you to withdraw money (up to 10% of your money) without a charge

 It depends on how old you are, your other investments, what income tax bracket you fall into, and how much extra money you have  You shouldn’t buy an annuity unless you:  Are an older person, close to retirement age, looking to save for retirement  Have already invested into 401 (k) plans, IRAs and other investment opportunities [before you have become close to retirement age]

 Are in a higher income tax bracket  Have additional money sitting around that you could save for retirement after you have invested in other retirement saving options

 No. Unless you are close to retirement or already retired and you may need more money than your social security.  Annuities are tax-deferred, while so are IRA accounts, which is why it doesn’t make sense to open an annuity within your IRA.

 After you die, a few things could happen to your annuity. It depends on which payout option you choose during your time of purchasing an annuity.  Someone else can receive your annuity payments for life after you die, someone else can receive them for a certain time period, or your money could be lost (see payout options)

 Be sure you invest in a company that you have confidence in it being there still when you retire  Do research about credit ratings of companies you may be looking to invest in  You can never really be certain about the outcome of the company, but there is always limited insurance on your money invested (which varies from state to state)

 It depends on the type of annuity you invest in  Either way, you are at risk of losing money but there are differences in what happens depending on which type you have  Fixed annuities are 100% at risk if the company closes  The maximum guarantee amount for insurance on annuities by states is generally around $100,000

 To reduce the risk of losing any money when investing in fixed annuities, try splitting your money up into different annuities  Variable annuities are split into two parts- the general account and the separate account  The general account is the part of your annuity investment that falls under the regular fixed annuity rules  The general account is an asset of the insurance company, so the money is at risk if the company closes

 But you also have a separate account where your money is invested in separate subaccounts or mutual fund investments  These subaccounts in the separate account are assets of the policy holder instead of the insurance company  This means that the money involved in these smaller investments would not be at risk if the insurance company were to become bankrupt and/or close

 Annuities are not insured by the FDIC or the federal government  Insurance companies have their own separate laws about the policies for dealing with the insuring of annuities  The average coverage for states is around $100,000 from a company  The insurance company has their own claims- paying ability which holds the safety of the contract provisions  Remember, within each insurance company, the insurance coverage on each type of annuity varies as well

 1035 swaps are usually what annuity exchanges are called.  You should make sure you have read all of the details of the contract to make sure you wont get charged any additional fees for exchanging it.  Also, when you exchange your annuity you begin a new ‘surrender period’ which means that if you wish to withdraw the money any time before the usual 7 years is up, then you have to pay the fee

 What happens in this circumstance depends on how long you have had the annuity. You may have to pay a fee if you have had it for seven years or less. The first year is often at 7% and it goes down one percent each year.  Usually the IRS will charge people under the age of 59 ½ a 10% fee for withdrawal.

 Companies give buyers an amount of time called a ‘free look period’ which is basically a short trial period where you decide if you wish to keep with that annuity. If not, you may cancel the contract before the period is up and not have to surrender any money for cancellation fees

 Gender influences annuity income. In general, men usually receive higher payments because the life expectancy of men is lower than that of women.  Age also influences annuity income because the younger you are, the higher your life expectancy is, which lowers your annuity income.

 Annuities are extremely easy to purchase nowadays. They can be purchased online by filling out a few questions and the company will then fill out all appropriate forms for you. Then you just electronically sign and the company immediately begins processing it for you  If the beneficiary of your annuity is taxed at a lower rate than you, then once the money is theirs, the tax is less and can be extremely beneficial to them

 Are annuities FDIC insured? If not, what insures them?

 NO! Annuities are not FDIC insured. The insurance company individually has its own insurance policies. The state sets general standards about annuities and the maximum cap that the insurance companies can offer.

 What are the two main types of annuities?

 Deferred annuities and immediate annuities  Deferred annuities are when your money is allowed to grow before you start receiving money on it  Immediate annuities give you payments soon after you put the money into it

 What is an annuity?

 An annuity is an investment contract between an insurance company and a person where a person makes a series of payments or pays a lump sum to the company and at a specified date, the person receives a check periodically for a certain period of time.

 What is one benefit to owning an annuity?

 They allow a large amount of money to be stored away and be tax deferred  There is also no limit on how much money you can put into your annuity annually, which is particularly good for people who need to save money for retirement quickly  The money you put away gets compounded each year without being taxed  When it comes time for your money to withdrawn, you can either choose to take it all at once or set up a payment plan

 How do you reduce the risk of losing money in your annuity?

 Split your money up into different annuities from different insurance companies  That way, your money is insured to the full amount from each company and you still get to invest in however much you want into annuities  Also, be sure to research insurance companies beforehand to make sure you invest in one you trust

 What type of annuity is 100% at risk if the company closes?

 Fixed annuities

 What are the parts of a variable annuity? Explain each part.

 They are split into two parts- the general account and the separate account  The general account is the part of your annuity investment that falls under the regular fixed annuity rules  The general account is an asset of the insurance company, so the money is at risk if the company closes  You also have a separate account where your money is invested in separate subaccounts or mutual fund investments  These subaccounts in the separate account are assets of the policy holder instead of the insurance company  This means that the money involved in these smaller investments would not be at risk if the insurance company were to become bankrupt and/or close

 What are the ways you can pay for an annuity?

 You can either make one lump sum payment into an annuity, you can make monthly payments into your annuity, or you can opt to make payments whenever you have extra money and are able to put it in

Loading... the benefit of annuities being tax deferred is that the money is taxed when the payments are made out. the purpose of an annuity is to wait until after you retire to start receiving payments. since you are no longer working full time when you retire, you are in a lower tax bracket than you would be at the height of your career. having your taxes taken out at the time of payment will make it so that you have to pay much less money in taxes. "The total protection per owner per member company is $100,000 for all annuity contracts. As a result if an individual owned three $100,000 annuities with the same insolvent insurance company, the guaranty association would provide coverage on only one of those annuities. The remaining annuities would be eligible for submission as a policyholder claim in the receivership, and the annuity holder may receive distributions as the company’s assets are liquidated by the receiver."