Planning is the key when it comes to preparing for retirement. Know the basics.

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The information contained herein is to be used as educational material only and is not intended to provide advice, legal or professional. This information should never be used as an original source of authority on any legal matters. Any laws and regulations concerning this material should be directed to the proper regulatory authority. Always review the regulations and statutes of the state in which you reside or are purchasing the insurance in. The information contained herein could become obsolete due to legislation, legal situations or industry practices. You must consult your own advisor for any and all legal or professional advice on any information contained herein.

Annuities have become a part of many individual’s retirement and investment planning.  Before you buy an annuity you should know some of the basics and be prepared to ask your agent / financial planner lots of questions about whether an annuity is right for you. Remember you are the one investing the money. It is your job to make sure what you are buying meets your investment strategy. It is the job of your insurance agent / financial planner to make recommendations to you on products and services that are available to you within your strategy and to make sure you are completely comfortable with what you are buying. If you are uncertain about something or you are not comfortable with the risk associated with what is being recommended, do not sign the check until you are. Changing your mind after you purchase the annuity, even during a free look period, could cost you money.  Annuities are for long term financial strategies and should not be used for short term planning because of the potential penalties imposed on annuities by the IRS and the insurance companies themselves. No matter what type of annuity you purchase, the IRS will impose a 10 percent penalty for withdrawals on growth of income if the withdrawal is made prior to age 59½. Because IRS allows annuities to grow tax deferred (you don’t pay taxes on the money until you withdraw it), the first monies withdrawn are from growth rather than from principal.  No penalty is imposed on the money put into the contract by the owner. The penalty is only on the growth and is in addition to the ordinary income tax (not capital gains) that will be due when the money is withdrawn. Also, if you withdraw money from your annuity within a certain period after you purchase the contract, the insurance company usually asses a surrender charge which is a type of sales charge. Generally, the surrender charge is a percentage of the amount withdrawn and usually declines over a period of several years, known as the surrender period. If you are doing periodic payments it is possible that each payment you make will have its own surrender period. Different contracts have different surrender periods. Many contracts will allow you to withdraw part of your account value each year – for example; 10% or 15% of value of your account, without paying the surrender charge. Keep in mind that the IRS will impose a 10% penalty on the growth/interest of the withdrawal if you are under age 59 ½.

Also, when you purchase a variable annuity you will be paying additional charges that will reduce the value of your account and the return on your investment. They will often include the following:

Morality and Expense Charge:
This charge is equal to a certain percentage of your account value. This charge compensates the insurance company for the insurance risks it assumes under the contract. Profit from the mortality and expense charge is sometimes used to pay the company’s cost of selling the annuity, such as a commission paid to your agent or planner for selling the annuity.

Underlying Fund Expense: These are the fees and expenses imposed by the mutual funds that are the underlying investment options for your variable annuity. These are indirectly paid.

Administrative Expense:
This fee is usually a flat dollar amount  that the insurance company may charge to cover the cost of record keeping and other administrative expenses. Many insurance companies waive this charge if the account value is above a certain dollar amount on a certain date.

Fees and charges for other features:
Most variable annuities offer special features to the contract that often carry additional fees or charges. These features can enhance the contract for the client and might include a step-up death benefit, a guaranteed minimum income benefit or long term care insurance rider.
Remember. You pay for each benefit provided by your variable annuity. Be sure you understand the charges, Consider whether or not you need the benefit. Also, is it better to buy the benefit as part of the annuity or can you purchase a separate policy for less?

You should be provided a prospectus
that will explain all these charges and features of the annuity. Make sure you go over them with your agent/financial planner and write in the margins your question and the answers. Keep the original prospectus and all changes with your contract. It will be your bible if you have a problem down the road. If you are investing in a variable annuity through an IRA, TSA or 401(k) plan, there is no additional tax advantage from the annuity.

What are some of the advantages of a variable annuity?
Variable annuities offer a range of investment options. The value of your annuity will vary depending on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest stocks, bonds, money market instruments or some kind of combination of the three.
Variable annuities let you receive periodic payments for the rest of your life. This feature can protect you against the possibility after retirement of outliving your assets. Variable annuities have a death benefit. If you die before the insurance company starts making payments to you, your beneficiary is guaranteed to receive a specific amount. Variable annuities are tax deferred. You pay no taxes on the income and gains from your annuity until you withdraw the money. You may also transfer your money from one fund to another within the account without paying taxes at the time of the transfer.

 What is an annuity?
Annuities are provided by Insurance Companies and are designed to provide supplemental retirement income.  It is a financial contract between you and an insurance company whereby you make a series of payments or a lump sum payment into the contract and the insurance company agrees to make periodic payments to you beginning immediately or at some future date. Annuities help people meet their financial needs. When planning your long-term investment strategy, annuities should be considered. One of the primary benefits of an annuity is the tax deferral on interest or growth. This applies as long as the funds are not withdrawn.

There are two types of annuities:
They are fixed annuities and variable annuities.

The fixed annuity is a guaranteed contract: The principal, interest and the amount of the benefit period is guaranteed.  The insurance company gives you a guaranteed interest rate for a certain period of time. At the end of that period there is a minimum guaranteed interest rate the company will pay while the contract is in force.

Variable annuities are not guaranteed but most do have a minimum guaranteed death benefit.  Well managed, variable annuities will keep pace with, and can exceed, the rate of inflation. Past performance of the funds within the annuity are no indication of future performance.  For agents to sell variable annuities they must be securities licensed. Variable annuities require an agent to get licensed with the SEC (Securities and Exchange Commission) or the  FINRA (Financial Industry Regulatory Authority, Inc.). In addition some states require a separate Variable Contracts License.

There are two phases of an annuity contract.
They are the accumulation phase and the Annuitization phase or payout phase.

The accumulation phase is sometimes considered as the growth years where you can contribute money into your annuity.

With the Annuitization phase or payout phase, the process is reversed. This is where you give the insurance company the money in your annuity contract and they agree pay you a fixed amount of money over the period of time you have selected starting on a specific date. It is very important that you understand that once the Annuitization phase begins it can not be changed.

Purchasing an annuity.
When purchasing an annuity you must always understand all of the terms to the best of your ability. If there are additions, withdrawals or a complete liquidation, there may be penalties or restrictions. Know what they are.

To understand annuities one must understand its terminology. It is not complicated but can be confusing to one who does not understand the meaning of certain concepts.

The following terms will help you get a better understanding of annuities:

Contract Owner. The person named in the Contract as the owner of the annuity. The contract owner can be an individual, couple, trust, corporation or partnership. The only requirement is that the owner must be an adult or legal entity. Since the contract owner controls the annuity, the owner has total control and can give the contract to anyone.

The Annuitant: The annuitant is probably the most difficult person to understand. The annuitant has no control over the annuity. This is the individual on whose life the Maturity date and the Annuity payments are based. That is all. Maybe the best way to describe the annuitant is to use an example of a life insurance policy. When a life insurance policy is issued, you have an individual named as the insured and that individual continues to be the insured until the owner of the policy either terminates the contract, stops paying the premiums or the insured dies and the face amount paid to the beneficiary.  With an annuity the terms of the contract remain in force until the owner makes a change or the annuitant dies. NOTE: The annuitant can also be the contract owner.

The Beneficiary: The beneficiary to an annuity can be an individual, trust, corporation or a partnership. Religious organizations as well as other charities and non profit organizations can be named as a beneficiary.  The owner of the annuity can change the beneficiary at any time.

Contract date: The date on which the contract is issued.

The Effective date:  The date on which the contract becomes effective. This date usually coincides with the date of the first purchase payment.

The Payment date:
This date is when the first purchase payment was received by the insurance company.

The Maturity date: This is the date on which the annuity payments are to begin.

Purchase Payment: This is any premium paid by the owner into the contract.

Underlying Fund: This is a portfolio of an open-end management investment company that is registered with the SEC in which the subaccounts invest.

A Subaccount is that portion of the assets of a Separate Account that is allocated to a particular Underlying Fund.

Separate Account:  This is a segregated account registered with the Securities and Exchange Commission, the assets of which are invested solely in the Underlying Funds. The assets of the Separate Account are held exclusively for the benefit of the contract owner.

Contract Value:  This is the purchase payments, plus or minus the investment performance on the amounts allocated to the various funds, adjusted by any applicable charges and withdrawals.

Cash Surrender Value: This is the contract value on the date the contract is surrendered less any surrender charges if applicable and any premium taxes not previously deducted.

Dollar Cost Averaging: This is a program that allows you to transfer a fixed amount of money to variable funding options each month, theoretically giving you a lower average cost per unit over time than a single one time purchase.

Systematic Withdrawal Option:
You can arrange to have money sent to you at set intervals throughout the year. Any income and penalty taxes will apply on the
amounts withdrawn.

 You may elect to have the company periodically reallocate the values of your portfolio to match the rebalancing allocations you have selected.

Spousal Continuance: This is subject to availability. If your spouse is named as an additional owner or is beneficiary and you die prior to the maturity date, your spouse may elect to continue the Contract as owner rather than have the death proceeds paid to the beneficiary.

Ask Questions before you invest.
The SEC writes it very well by stating:
“Financial professionals who sell variable annuities have a duty to advise you as to whether the product they are trying to sell is suitable to your particular investment needs.” Don’t be afraid to ask them questions. And write down their answers, so there won’t be any confusion later as to what was said. Better yet. E-mail your agent and keep the response in your file for reference if needed.
Variable annuity contracts typically have a “free look” period of ten or more days, during which you can terminate the contract without paying any surrender charges and get back your purchase payments (which may be adjusted to reflect charges and the performance of your investment). You can continue to ask questions in this period to make sure you understand your variable annuity before the “free look” period ends.
Before you decide to buy a variable annuity, consider the following questions:
* Will you use the variable annuity primarily to save for retirement or a similar long-term goal?

* Are you investing in the variable annuity through a retirement plan or IRA (which would mean that you are not receiving any additional tax-deferral benefit from the variable annuity)?

* Are you willing to take the risk that your account value may decrease if the underlying mutual fund investment options perform badly?

* Do you understand the features of the variable annuity?

* Do you understand all of the fees and expenses that the variable annuity charges?

* Do you intend to remain in the variable annuity long enough to avoid paying any surrender charges if you have to withdraw money?

* If a variable annuity offers a bonus credit, will the bonus outweigh any higher fees and charges that the product may charge?

* Are there features of the variable annuity, such as long-term care insurance, that you could purchase more cheaply separately?

* Have you consulted with a tax adviser and considered all the tax consequences of purchasing an annuity, including the effect of annuity payments on your tax status in retirement?

* If you are exchanging one annuity for another one, do the benefits of the exchange outweigh the costs, such as any surrender charges you will have to pay if you withdraw your money before the end of the surrender charge period for the new annuity?

Remember:   Before purchasing a variable annuity, you owe it to yourself to learn as much as possible about how they work, the benefits they provide, and the charges you will pay.

For more information on annuities available to you in your state contact your professional insurance agent.

There is an old saying “Measure twice, cut once”. The same can apply when purchasing an annuity. Think twice act once. To make sure your money goes where you want it to go compare and be sure. Fees reduce the value of your account whether you make money or not.  Make sure you know all the fees and charges that are associated with the contract you are thinking of buying. If you are replacing one annuity with another, make sure you understand the surrender charges and any other penalties that might be involved. Here are a few fees that insurance companies charge for managing your money:

Compare and be Sure Chart

M&E Fees
(Mortality & Expense)
     What is the percentage   __________%
Average Fund Expense Fee      What is the percentage   __________%
Administrative Fees      What is the percentage   __________%
Rider Fees
What are they?
     What are the percentages   __________%
Other: Fees associated with
this annuity that will reduce
your value
    What are the percentages   __________%
Annual Fee/When is it waived     Dollar amount or percentage $____or___%
Surrender charges    What is the percentage and for
how many years
Free Withdrawal amount.
Is it available and how does it work?
What is the amount or percentage?
Is it on premiums paid or account value?
If exercised does the death benefit reduce
dollar for dollar or on a pro-rata basis?

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