Saturday, May 19, 2012
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Annuities

 

Annuities are agreements between you and an insurance company where you agree make a lump-sum payment or series of payments, and in return, the insurer agrees to make payments to you beginning immediately or a future date. Typically earnings are tax-deferred, and may include a death benefit that will pay your beneficiary a guaranteed minimum amount, such as your total purchase payments.


There are generally two types of annuities—fixed and variable. Fixed annuities are characterized by a minimum interest rate guaranteed by the issuing insurance company. Typically, a minimum annuity benefit is also guaranteed. The funds contributed to the contract by the annuity owner are placed in the insurance company’s general account, and the investment risk involved rests entirely on the insurance company. With a fixed annuity, the focus is on safety of principal and stable investment returns.
In contrast, a variable annuity contract generally has no guarantees as to investment return or annuity benefits. The funds contributed by the contract owner are placed in special, variable annuity subaccounts. Within these subaccounts, the annuity owner may choose to invest the funds in a wide variety of investment options. Annuity benefits depend upon the investment results achieved, and the investment risk rests entirely on the contract owner. With a variable annuity, the goal is to provide benefits that keep pace with inflation.
  
  
 

 

Variable annuities are long-term investments designed for retirement purposes. Early withdrawals may be subject to a deferred sales charge and if taken prior to age 59½, a 10% federal penalty may apply. Money distributed from the annuity will be taxed as ordinary income in the year the money is received. Account values fluctuate with market conditions, and when surrendered the principal may be worth more or less than its original amount invested. Tax deferral is provided by your employer's plan and the tax deferral of the annuity does not provide any additional benefit. Annuities may be subject to additional fees and expenses to which other tax-qualified plan funding vehicles may not be subject. Generally, variable annuities contain mortality and expense charges, account fees, investment management fees, and administrative fees. However, annuities provide features and benefits such as lifetime income payments and death benefits which may be valuable to you. The guarantees of annuity contracts are contingent on the claims-paying ability of the issuing insurance company.

Variable annuities are sold by prospectus only, which contain more information. Please read it and consider carefully the product’s objectives, risks, expenses and charges before you invest or send money.  The prospectus contains this and more information about the investment companies.