By: Dan Schulte, Senior Vice President and Manager, Annuities and Insurance
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The National Association of Fixed Annuities (NAFA) has deemed the month of June “Annuity Awareness Month”. Saving for retirement or future income needs using annuities provide income tax deferral. Annuities can also be used to provide a lifetime guaranteed income stream, provide guaranteed death benefit protection, and/or provide accumulation benefits that have upside potential with downside protection. Insurance companies in the US issue these products and the recent rise in rates have allowed annuities to offer increased yields and benefit guarantees on their products.
Various type of annuities exists, but basic structures include:
Fixed interest annuities offer a guaranteed rate of return for a certain number of years. Fixed annuities are contracts issued by life insurance companies to individuals looking for guaranteed rates of return for a certain number of years without any risk to principal. As interest rates are increasing, the policyowner can lock in the rate throughout the term. Even if the Federal Reserve cuts the interest rate after a few months, the current rate would be guaranteed for a specific number of years.
Fixed indexed annuities have similar features as a fixed interest annuity, except the annual growth is bench-marked to a stock market index (e.g., Nasdaq, NYSE, S&P500) rather than a fixed rate of interest. An indexed annuity’s growth is typically subject to rate floors and caps, meaning it will not exceed or fall below the specified return levels even if the underlying stock indices fluctuate outside of those set parameters.
Income annuities will provide a guaranteed income for a specific period of time and/or for life. The lifetime payout rates are based on life expectancy and interest rates. Since rates have increased to a level not seen in years, the insurance carriers have increased their guaranteed payouts accordingly.
Variable annuities premiums are invested in mutual fund type subaccounts and your principal could fluctuate depending on the rise and fall of the underlying investments. Due to the market risk, some investors purchase variable annuities along with a “living benefit income rider” that will guarantee a certain amount of income even if the investment performs poorly. The rise in interest rates have increased the guaranteed income payout rates on these contracts. Strong variable annuity contract performance typically provides a higher income stream than the guaranteed income amount promised by the contract.
In addition to the protection features, investors in annuities enjoy tax-deferred growth of earnings.
Annuities are long-term investments and will often have surrender charges, as well as other fees and expenses, so you should be careful not to invest a large portion of your liquid net worth into annuity contracts. Because of the complexity of annuities, you should understand the features, risks and costs prior to making a purchase. Your Benjamin F. Edwards financial advisor can help you analyze your situation and discuss various option to consider as a complement to your portfolio.
Variable annuities are subject to investment risk, including loss of principal, and contract/policy values fluctuate daily. Investment returns and principal value will fluctuate with market conditions so that units, upon distribution, may be worth more or less than the original cost.
Before making any purchase decision, please consider all costs, fees, and expenses associated and whether such a purchase is consistent with your risk tolerance, liquidity needs, potential long-term care needs, life expectancy, and your ability to understand all features of an annuity.
Note: All annuity guarantees are subject to the claims paying ability of the issuing carrier.