An Annuities Primer
Though popular among today's aging Baby Boomers and members of the Mature or "Senior" markets, annuities can be traced back to ancient Greece. The term "annuity" comes from the Greek word "annus"-or "year"-and refers to annual income payments. Similarly, in ancient Rome citizens would make one-time payments to a contract called "annua" in exchange for lifetime payments made once a year.
In 17th century Europe, annuities were used as fundraising devices by governments to finance their ongoing wars with neighboring nations. These governments would offer "tontines," which promised payments into the future to those who bought shares.
In the 18th century annuities were introduced to North America, with private insurance companies selling insurance and annuity contracts to individuals wanting to avoid outliving their resources, In 1759 in Pennsylvania a company was formed to benefit Presbyterian ministers and their families. The ministers would contribute to a fund, in exchange for lifetime payments. In 1912, the Pennsylvania Company for Insurance on Lives and Granting Annuities became the first American company to offer annuities to the public.
However, annuities experienced a huge growth in popularity during the late 1930s when the collapsing financial markets turned many people away from equities in favor of products from more secure institutions-insurance companies that could and did make annuity payments, as promised.
Early annuities were simple contracts guaranteeing a return of principal and fixed rates of return from the insurance company during the accumulation phase. At withdrawal, the annuitant chose either a fixed income for life or payments over a specific number of years.
Buyers have always been drawn to annuities by their tax-deferred status. As a consequence of being issued by insurance companies, annuities have always been able to accumulate without taxes being taken out at year-end, which has added the time value of money to their list of advantages.
The most recent major development has been the inception in 1952 of variable annuities, which offer the investment features of separate mutual fund accounts inside the annuity with the tax-deferral available from life insurance products. Variable Annuity owners choose the type of accounts to use, often receiving modest guarantees from the issuer in exchange for the greater risks assumed.
"The shift to investment-linked annuities has been so marked that 25,000 investment-linked annuities were sold [in 2001] - 9.5% of all annuity business," reports Peter Quinton is managing director of The Annuity Bureau, adding that "it's likely that the popularity of these annuity will continue to increase as they are the only at-retirement products that offer retirees a half-way house between the two extremes of purchasing a safe conventional annuity and opting for a investment-linked income drawdown plan, where the cross-subsidy system does not apply." Source: Pensions Management; 12/1/2002
Although long part of well-diversified financial portfolios, annuities have continued to evolve. Recent developments have included features such as adding checkbook access to Variable Annuity funds, more attractive "bonus" rates, shorter maturity periods, and guaranteed death benefits.
But consumers now have wider choices of annuity types, plus more investment options and guarantees to fit their investment and income goals. For example, some annuities offer guaranteed bonus interest rates for the first few years or guaranteed returns for the life of the contract. Other annuities guarantee beneficiaries the return of principal if the annuitant dies and the annuity stock market investments have lost value.
Although annuities have evolved, their primary objective remains the same. That is, being able to lock in a guaranteed payout that cannot be outlived. As people live longer, healthier lives--and the equities markets remain subject to unsettling fluctuations--financial products offering safety, flexibility and guaranteed returns are increasingly appealing to older consumers. However, investors of all ages are drawn to variable annuities whose return is tied to the stock market, but which also offer guaranteed minimum returns not tied to market performance.
Annuities are accessible. Because there are no contribution limits, people can invest as much or as little as they chose in annuities no matter what their income levels. And this money grows on a tax-deferred basis until the accumulated earnings are distributed, usually at retirement.
Moreover, unlike other tax-deferred investments during the distribution phase, annuities' tax-deferred earnings are not counted in determining a person's income taxes on Social Security benefits. At the same time, while annuitants cannot outlive their guaranteed benefits, properly structured annuity contracts and beneficiary designations can:
1) avoid probate,
2) protect assets held in trust from mismanagement by a parent of guardians, and
3) continue benefits to the annuitant's heirs, thus making annuities effective multigenerational planning vehicles.
With their unique advantages, a growing market for annuities has grown among individuals with longer-term wealth accumulation and retirement planning needs, as well as individuals with immediate income needs. Let's consider how two types of annuities can be used to address the wealth accumulation and retirement planning problems we all face. These are:
? Non-qualified Annuities
? Qualified Annuities
Non-Qualified Annuities -- Non-qualified annuities are purchased with after-tax dollars to meet longer-term wealth accumulation or retirement planning needs--with emphasis on longer-term.
As noted, deferred annuities may not be appropriate for shorter-term wealth accumulation purposes - generally those that will materialize before age 59½; while immediate annuities are designed to provide long-term income - that is, income guaranteed for life.
Non-qualified annuities are used to fund cash accumulation programs that do not qualify for a front-end tax deduction; but whether an annuity is qualified or non-qualified, premiums always accumulate interest that is free of current income tax until withdrawn. But non-qualified annuities also allow owners to continue tax deferral beyond the age 70, the mandatory withdrawal age for traditional IRA's and qualified retirement plans.
Qualified Annuities-- Annuities can also accommodate tax-qualified money. A qualified annuity is used to fund a tax-qualified retirement plan such as a traditional IRA or an HR-10. Thus in most cases, premiums paid to qualified annuities are tax-deductible. For instance, when people change jobs and have 401(k) funds to move or already have IRAs and are seeking a more diversified portfolio. They can reduce their portfolio exposure by rolling the money over into an annuity without losing tax advantages.
Or suppose Alice inherits $20,000. If she doesn't need the money right away and wants to build a long-term nest egg, she might consider putting the inheritance into an annuity. By doing so, she'll gain the advantage of tax-deferral, and when it's time to withdraw funds from her non-qualified annuity, Alice will only be taxed on the accumulated interest, not the principal.
Generally, annuities are not suitable estate planning vehicles, but are useful in meeting immediate and retirement income needs. Thus, iif you're a candidate for wealth accumulation and retirement planning, remember: "The only person who can take care of the older person we will someday be is the younger person we are now."
Want More? Send questions and comments to email@example.com
Bill Willard has been writing high-impact marketing and sales training for the financial services industry for over 30 years. Through interactive, Web-based "Do-While-Learning?" programs, e-Newsletters and straight-talking articles, Bill helps agents and advisors get the job done: profitably improving performance, skipping expensive mistakes, and making the journey to success faster, smoother, easier. And fun!
Why Should I Go To A Life Insurance Broker?
A life insurance broker is a dedicated person that encourages and listens to the needs and wants of a person looking for life insurance. It doesn't matter what type of life insurance you are looking for, whole or term life. A broker will be able to find suitable rates for you to choose from. When you contact a life insurance broker, you can get the life insurance you need from a company in another city or state that you probably never even heard of.There are many benefits to dealing with a life insurance broker when you want to purchase a life insurance policy. The broker is familiar with the requirements of many different companies and knows which ones he/she can contact to get you the best rates on life insurance. It does not cost anything extra to use a broke...(related: Insurance)
Origin Of Long Term Care Insurance
In the early 1980's Medicare started using a system called the diagnosed related group of guidelines for advance payments to hospitals. This has really given hospitals authority and incentive to discharge patients very soon after admission to the hospital.The hospital gets paid the same whether the patient is in 3 days or 6 days. So the hospital can make more money if they free up the bed sp...(related: Insurance)
How Much Renters Insurance Do I Need?
When obtaining renter's insurance it is important to put serious consideration into how much insurance you really need to buy. Some things you may want to consider when making this decision include whether or not you can afford to re-purchase everything in your home in the event that disaster strikes. You may also want to ask yourself what you would do if a neighbor slipped and fell on the wet floor in your kitchen and decided to take legal action against you.How much personal property coverage you need to buy naturally is based on how much your personal property is worth. An excellent way to assess ho...(related: Insurance)
Who Sets Auto Insurance Rates?
Auto Insurance rates are a complicated business. Have you ever wondered who sets your auto insurance rates and how the rates are actually derived?Many factors determine how much you will pay. Most of these are common sense and you probably already know but let's go over them just in case.The very first thing that occurs is that the insurance company determines all its costs for the previous year. This includes all claims, the cost of opera...(related: Insurance)
Senior Life Settlement-uses And Applications
In a recent article in the National Underwriter (April, 2005) a Senior Life Settlement is depicted as an ingenious financial planning option available to consumers by providing access to secondary life insurance market through life insurance valuation ? a new trend, tool in the financial advisory services industry unlocking opportunity for many.Sound investment practices require diligence and regular appraisal and valuation of assets. To date insurance policies were excluded from said valuations, due to the perceived absence of market for them. However, the landscape, opportunity and choices open to seniors, retirees etc. faced with a life settlement issue has changed significantly and people are taking notice.The premise and principles seem to be simple and back ...(related: Insurance)
Is Your Auto Insurance Company Rated?
Several national rating institutions rate insurance companies. Do coverages, rates, and service vary from company to company? Why can you pay less with one company than another can for the same coverages? Choosing the best insurance company for you is a crucial financial decision. Does your insurance company have the financial strength to safeguard you and your family? If the company cannot pay future claims or benefits, other issues become far less relevant. Financial strength ratings are an analysis of a wide variety of risks that could affect an insurance company's long-term viability. Insurance companies have failed or ceased to operate due to inadequate financial...(related: Insurance)
The Awful Truth About Annuity And Insurance Leads
You see the websites, you see the ads: exclusive, never before sold, prospects eager to buy, insurance and annuity Leads. Some leads cost a few dollars - others are over one-hundred a pop.I was curious, just how good are these insurance and annuity leads? I decided to find out.I'm not going to name specific insurance and annuity lead websites, but I will give you a summary...(related: Insurance)
Gain An Advantage Over Your Competition By Controlling The Cost Of Your Health Insurance
As many of us expect, the New Year will bring both tremendous challenges and opportunities for all of us both personally and professionally. Employers continue to face the major challenge of controlling the cost of their health insurance and other employee benefit programs. Organizations that can best get a handle on the cost of their employee benefit programs have an excellent opportunity to gain an advantage over their competition.What are some practical ways to control the cost of your health insurance? Here are a few suggestions:1) Investigate all of your traditional and consumer directed health plan options. Many companies are easing into consumer directed plans by offering them as part of a "dual cho...(related: Insurance)
Student Health Insurance - Is It Necessary?
As a young, healthy college student, it might be tempting to forgo the expense of health insurance. After all, you're young, you're careful and you're not sick. You don't real...(related: Insurance)
Family Health Insurance Plans - How To Find The Best Provider Online
Family health insurance plans typically need to offer more coverage than plans for an individual. Regular check-ups and occasional emergencies need to be covered, especially if you have children. The best providers offer this level of coverage at a reasonable premium, but you have to research to find them.Pick Your PlanFees-for-service and managed care are the basic types of family health insurance plans offered. Fees-for-service allows you to choose your own physician, but often they don't cover preventative care. Managed care plans offer preventative care with a lower premium, but you have to use physicians from their network.Within these types of plans, there are hundreds of variations depending on the health i...(related: Insurance)
Travel Health Insurance - Understand The Benefits
If you're planning an overseas trip, you need travel health insurance. Every year, nearly 1 million Americans require emergency medical treatment while overseas. Traditional health insurance plans limit the expenses and amounts that they will pay outside the country, and necessary care may be delayed while arrangements for payment are made.Imagine being on vacation in Europe and breaking your leg, only to f...(related: Insurance)
Photography Insurance-insurance For The Photographer
Part and parcel of establishing your own photographic business is establishing your own legal entity. This means establishing yourself for taxes. This is broader than the scope of this article, because every country has it's own business rules. Also every state in federal countries has different legal rules. The first thing you need to...(related: Insurance)