Annuities

Definition  Typically created by life insurance companies  Provides a series of payments  Must be funded by the investor

Accumulation period  Money IN  Can be done in one lump sum (single premium)  Can be done over time (installment contract)

Distribution period  Money OUT  Multiple options

Distributions  Life annuity (no refund): results in higher monthly payments  Guaranteed minimum annuity: life annuity period certain, refund annuity  Annuity certain: Set period of time, set amount

Distributions (cont.)  Temporary life annuity: specified time period ONLY if you live  Immediate annuity: starts now  Deferred annuity: just like it sounds

Rates of return  Fixed rate annuity: guaranteed rate of interest, no loss of principal Low rates (money market) Company can pay whatever rate they want

Rates of return (cont.)  Variable annuity Amount paid depends on investment results Self-directed investments Can have a very limited selection of investments Possible to LOSE ground

Benefits of Annuities  Source of income that cannot be outlived (if you structure it right)  Tax-sheltered investment (tax-deferred)

The down-side  Fees: Management fees (1-2%) Insurance fees (1%) Contract charges (around $50 / year) Early withdrawal penalty fees charged by COMPANY (Surrender fees of 5-10%) Early withdrawal penalty of 10% charged by IRS

Down-side (cont.)  Returns: Typically awful…but shop around Bait and Switch: High rates advertised, which drop after several years.

Common Sense on Annuities  Shop around: Compare: Fees Performance Management Insurance company rating matters: Moody’s S&P