What is an Annuity?

An annuity is a contract between you and an insurance company that offers tax deferred growth. By postponing the amount you would normally pay for taxes, your money compounds faster because you can earn interest on dollars that would have otherwise been paid to the IRS. The insurance company insures you will not lose any principle or accumulated interest. In return, you will receive a competitive rate of return. The rate of return can be a fixed rate, or you can invest in an index that is tied to a market. The S&P 500, NAS 100, Lehman Bonds, International Index and the Global 500 index are just a few choices. These indexes provide a higher rate of return than a fixed rate. The insurer agrees to make periodic payments to you beginning immediately or at a future date of your choosing. There are several options that will enhance your investment strategy. They may include a death benefit, a nursing home waiver, terminal illness waiver just to name a few.

There are generally three types of annuities–fixed, indexed and variable. In a fixed annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your account is growing. Indexed annuities gain interest based upon the index that you choose. Variable annuities gain interest based upon the performance of a stock or fund. The insurance company also guarantees that payments will be a guaranteed amount each month for income. These payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

What is a Fixed Tax–Deferred Annuity?

A Fixed Tax–Deferred annuity, is a contract between you and an insurance company with guaranteed income options. The insurance company credits interest, and you don‘t pay taxes on the earnings until you make a withdrawal or begin receiving an annuity income. Your annuity contract earns a competitive return that is very safe. These are similar to bank CDs, except that you don‘t pay taxes on your earnings until withdrawal. This tax deferral can amount to large savings over a bank CD.

Savings Advantages
Many people today are using tax–deferred annuities as the foundation of their overall financial plan instead of certificates of deposit or savings accounts. Although CD‘s and Annuities are very similar there are significant differences between the two. The most important difference is that annuities allow for the deferral of the taxes due on the interest earned until the interest is withdrawal! By postponing the that tax width a tax–deferred annuity, your money compounds faster because you can earn interest on dollars that would have otherwise been paid to the IRS. Later, if you decide to take a monthly income, your taxes can be less because they will be spread out over a period of years. Like Certificates of Deposits, annuities have a penalty for early surrender, however most annuity contracts have a liberal withdrawal provisions.

Contact a Walker Winslow Advisor to discuss your Annuity Options.

What is a Market Indexed Annuity?

A market indexed annuity is a special type of contract between you and an insurance company. During the accumulation period – when you make either a lump sum payment or a series of payments – the insurance company credits you with a return that is based on changes in a market index, such as the S&P 500 Composite Stock Price Index. The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum.

What are some of the contract features of Market Indexed Annuities?
Indexed annuities are complicated products that may contain several features that can affect your return. You should fully understand how an indexed annuity computes its index–linked interest rate before you buy. An insurance company may credit you with a lower return than the actual index‘s gain. Some common features used to compute a market indexed annuity‘s interest rate include:

Participation Rates.: The participation rate determines how much of the index‘s increase will be used to compute the index–linked interest rate. For example, if the participation rate is 80% and the index increases 9%, the return credited to your annuity would be 7.2% (9% x 80% = 7.2%).
Interest Rate Caps.: Some indexed annuities set a maximum rate of interest that the indexed annuity can earn. If a contract has an upper limit, or cap, of 7% and the index linked to the annuity gained 7.2%, only 7% would be credited to the annuity.
Margin/Spread/Administrative Fee.: The index–linked interest for some annuities is determined by subtracting a percentage from any gain in the index. This fee is sometimes called the "margin," "spread," or "administrative fee." In the case of an annuity with a "spread" of 3%, if the index gained 9%, the return credited to the annuity would be 6% (9% – 3% = 6%).

Another feature that can have an impact on a market indexed annuity‘s return is its indexing method (or how the amount of change in the relevant index is determined). Some common indexing methods include:

Annual Reset (or Ratchet): This method credits index–linked interest based on any increase in index value from the beginning to the end of the year.
Point–to–Point: This method credits index–linked interest based on any increase in index value from the beginning to the end of the contract‘s term.
High Water Mark: This method credits index–linked interest based on any increase in index value from the index level at the beginning of the contract‘s term to the highest index value at various points during the contract‘s term, often annual anniversaries of when you purchased the annuity.

Contact a Walker Winslow Advisor to discuss your Annuity Options.

What is an Immediate/Income For Life Annuity?

With the increasing lifespan of our country‘s population, the retirement years are stretching even further over the horizon than ever. Statistics now indicate that large numbers of the retired will live to be 90–100 years old, placing a greater burden on the present funding for retirement.

Couple this with the recent losses in the stock market over the last few years, and the growing trend among large companies to reduce pension benefits, retirees have begun to question whether they are adequately prepared for their retirement. Many have begun looking around for ways to ensure they don‘t run out of money before they run out of time.

Some potential retirees are choosing to work longer in an attempt to build a bigger nest egg. Others are reducing the amount of income necessary by downsizing their home or paying off debt earlier. And in order to insure a lifetime of income, many are turning to single premium immediate annuities in tandem with the more traditional deferred annuity to insure their security in retirement.

How does it work? To begin with, the purchase of an immediate annuity offers the option of choosing a payout method. This can be for life, restricted to a certain time period, or a joint and survivor method, which will continue to pay after the death of the first spouse. The idea of a guaranteed income, no matter how long you should live, is a definite plus considering the uncertainty in other types of investments.

Contact a Walker Winslow Advisor to discuss your Annuity Options.

Single Premium Immediate Annuity

What is a Single Premium Immediate Annuity?
A Single Premium Immediate Annuity is a contract between you and an insurance company. By paying in a lump sum of money you are guaranteed to receive a series of payments over a period of time. The amount of the payment is determined by both the current interest rate at the time your contract is issued and by choices you make from a wide variety of payment options. Once your contract is issued, your payments are fully guaranteed for the period of time you have chosen.

Tax–Favored Income?
If you use after–tax funds to purchase a single premium immediate annuity, the income payments you receive are only partially taxable. The non–taxable portion of each payment is a level percentage that represents the return of principal over the life of the contract. Depending on your age and the payment option you chose, this percentage will vary. If you are using tax–qualified funds (IRA, TSA, 401k money for example) to purchase your Single Premium Immediate Annuity, the payments you receive are generally fully taxable as you receive them because they represent funds that have not been taxed before.

Single Premium Immediate Annuities offers a variety of options so you may taylor your income schedule to suit your needs. You can chose to receive payments, monthly, quarterly, semiannually or annually. The payment options include:

Period Certain Only: Period Certain means a number of years you chose. Payments will continue for the duration of the number of years you chose, and then cease. If you should die before the end of the stated number of years, your beneficiary would continue to receive the payments for the remainder of those years.
Life Only: Payments will continue for the rest of your life. You cannot outlive your income. Upon your death, payments stop.
Life and Period Certain: Life and period certain means payments will continue for the rest of your life, but for no less than the stated number of years. If you should die before the end of the stated number of years, your beneficiary would continue to receive the payments for the remainder of those years.
Life Only with Guaranteed Minimum Option: Payments will continue for the rest of your life. If you should die before you have been repaid your initial investment, the balance of your initial investment will be paid in like installments to your beneficiary.
Joint and Survivor: Payments are guaranteed during the lifetime of two people. After the death of one, payments continue for the lifetime of the surviving person. You can chose to have either full payments, or a percentage you chose, to continue for the lifetime of the survivor. You can also specify a period certain, and if both individuals were to die within the period certain, payments would continue to the named beneficiary for the remainder of the period certain.

Contact a Walker Winslow Advisor to discuss your Annuity Options.

What is a Tax Sheltered Annuity?

A tax–sheltered annuity, or TSA, is a long term retirement plan that provides a systematic, tax sheltered way to accumulate funds for retirement. If your work for a school or other qualifying teahouse organization covered under IRC Section 501(c)(3) you can accumulate money for your retirement in a special tax sheltered plan – a 403(b) Tax Sheltered Annuity.

A TSA reduces your current taxable income.
TSA contributions are excluded from your current taxable income and the interest earned or capital gains credited to your account are tax deferred until you begin to receive distributions from your TSA. The IRS has created a formula known as the Maximum Exclusion Allowance which governs the maximum contribution that you may make to as TSA in a given year.

A TSA offers a high degree of financial security.
TSA‘s are commonly offered in the form of fixed annuities or equity index annuities. These TSA‘s are guaranteed to earn no less than a guaranteed minimum interest rate stated in the annuity contract. The fixed annuities are backed by the general account of the insurance company.

Having a TSA doesn‘t reduce other retirement benefits?
You receive TSA benefits in addition to your pension benefits. Social Security credits are not affected because they are determined by your gross earnings prior to TSA contributions.

Contact a Walker Winslow Advisor to discuss your Annuity Options.

Disclaimer: This is for information and educational use only. For specific information concerning investments in the stock market please consult with a securities licensed professional.