There are three types of fixed annuities; the Single Premium Deferred Annuity, and Flexible Premium Deferred Annuity are designed as accumulation investments, and accumulate interest on a tax deferred basis. They are also known as "deferred because of the fact that taxation is deferred. Single Premium Immediate Annuity is opposite of the deferred annuities, in that it is designed to provide a series of periodic payments in exchange for a lump sum deposit. It is often called an "income annuity", or "immediate annuity".
Tax Deferred Accumulation
The earnings which accumulate inside of your deferred annuity accumulate on a "tax deferred" basis. Tax deferral is the most powerful aspect of an annuity. You are not taxed on the interest while it is accumulating. You are only taxed when you choose to withdraw all or part of your earnings. This means that you are earning interest on dollars that would have been paid out in taxes each year if you were in a taxable investment like a bank's Certificate of Deposit. Therefore you are earning interest on your principal, interest on your interest, and interest on the dollars which would have been paid out in taxes each year. You control your taxation, because you choose when to pay the taxes. Tax deferral is an important component of annuities, but they also have many other significant benefits.
Probate Avoidance
In an Annuity the death proceeds pass directly to your named beneficiaries, and therefore avoid the costs and delays of probate.
Guaranteed Minimum Rate
Unlike bank CD's, annuities have a guaranteed minimum interest rate set in the policy that can never change. This is the absolute lowest rate that you can ever be credited. It varies by product but is generally 3% to 4%.
Liquidity
Most annuities allow for one free withdrawal of up to 10% - 15% of the annuity value each year, with no penalty or you may choose to withdraw the interest only on a monthly basis.. Please keep in mind that any withdrawal from your annuity prior to age 59 ½ may be subject to an IRS penalty of 10% of the amount withdrawn.
No Sales Charges, Load of Fees
There are no sales charges and no annual administrative fees subtracted from your premium. 100% of your contribution earns interest from the first day after your funds are received.
Are annuities safe?
Safety. In addition to the benefit of tax deferral, safety is the main reason people purchase annuities. Many of the companies offering annuities today are very highly rated by the various independent services which are in the business to evaluate insurance companies financial strength. These services include A.M. Best, Duff & Phelps, Moody's, Standard & Poor's, and Weiss Research. But beyond each company's financial strength ratings, is an underlying protection called the "legal reserve system". This system, which all insurance companies must adhere to, includes rules regarding asset management and accounting guidelines, as well as reserving requirements. These reserving requirements insure that reserves are held specifically to protect against losses in the insurance company's investment portfolios. Nobody has ever lost a penny of their principal in a fixed annuity. Not many other investments can make this same statement.
Protection in the event of a catastrophic illness
Annuities, although usually purchased in order to provide a source of income for retirement, are occasionally shelter assets so that individuals purchasing them can become eligible for Medi-Cal.
Flexible payout options
Life Only Annuity - Income will continue for the rest of your life, regardless of how long you live. This option produces the greatest income, but upon death the income stops, with nothing remaining for beneficiaries.
Life With Period Certain - Income will continue for the rest of your life, regardless of how long you live. But if death occurs within the Period Certain, which you specify, income will continue to your beneficiaries for the remainder of the specified period.
Period Certain - Income will be paid over a period of time which you specify, and stop at the end of that period of time. But if death occurs within the Period Certain, income will continue to your beneficiaries for the remainder of the specified period.
Life With Installment Refund - Income will continue for the rest of your life, regardless of how long you live. But if death occurs before you have recovered your initial deposit, income will continue to your beneficiaries until they have recovered the balance of your deposit.
Life With Cash Refund - Income will continue for the rest of your life, regardless of how long you live. But if death occurs before you have recovered your initial deposit, the balance will be paid to your beneficiaries in a single lump sum.
Joint and Survivor - This type is issued on two lives, usually a husband and wife. Income will continue for the full life of the longest surviving individual, regardless of how long they may live. This option allows reducing the benefits upon the first death.
As you see there are numerous variations and options among these plans. Due to the complex nature of this variety of annuities, we recommend that you contact our office at (916) 961-2845.