What is an Annuity?
What is a Fixed Annuity?
What is a Fixed Indexed Annuity?
What is an Immediate Annuity?
What are Annuity Crediting Methods?
What are Annuity Payout Options?
What is an Annuity Fixed Account?
What is an Annuity Indexed Account?
What is Monthly Point to Point?
What is Annual Point to Point?
What is Annual Roll up?
What is Annual Reset?
Can I exchange my Annuity?
What is Bucket Methodology?
What is Triple Interest Crediting?
What is Spousal Continuance Provision?
Start a Fixed Annuity with Maryland Annuity Resource
Fixed income or CD Type annuities are the oldest type of annuity contracts that governments have offered to the general public. Caesar of Rome sold annuities, requiring a lump sum payment and promising yearly returns for its legions of citizens. European governments funded most of the wars of the 17th and 18th centuries with annuity contributions. Also in the United States, fixed annuities appeared in the 18th century as a way to support up and coming church’s and chuch pastors. Then a Pennsylvania life insurance company got the commercial ball rolling close to 1912, the contracts quickly became popular, and now they’re used by millions of conservative investors all over the world. But we can help you if your in Maryland, D.C. or Virginia.
The Basics of Fixed Annuities
In addition to the benefits of tax deferral, your choice of payment options, and exemption from probate and creditors, fixed annuities usually pay higher rates of interest than Bank CDs or other traditional guaranteed instruments. As you would suspect, savvy and informed investors look to these contracts to achieve a slightly superior rate of growth. Some benefits are:
- Fixed annuities usually mature after anywhere from one year to ten years and used in laddering strategies.
- Fixed annuities will automatically renew at a revised interest rate unless you withdraw or move the account.
- Rates of return will depend on current interest rates and reset when the annuity matures.
As with all other types of annuities, fixed annuities usually contain a schedule of declining surrender charges, stated in the contract beyond the 10% early distribution penalty levied by the IRS if it is qualified contract. Non Qualified contracts do not have this penalty, but interest earned if withdrawn is considered income and taxable. This charge gradually decreases by a percent or two each year until it is gone.
As an example, a 10 year fixed annuity contract may charge a 6% penalty for any funds you take out within a year of purchasing the contract, a 5% penalty for anything withdrawn in the second year, and so on until the surrender charge schedule expires completely. But many contracts let you withdraw anywhere from 10% to 20% of the value of the contract every year with no penalty, providing some liquidity options.
Payout Options for Fixed Annuities
Beneficiaries have several payout options to choose from, including:
- Straight life. Set dollar amounts – based on actuarial tables – that pay out over the rest of your life, even if the total payments exceed the amount of original contributions plus growth. The downside of this payment option is that the payments will stop at death, even if the total payout is less than the value of your original investment. We do not suggest this option but it is there if you want it.
- Joint life. An option for you and a co-beneficiary, in which you’ll be paid as long as one of the two of you is still living.
- Life with Period Certain. A payout plan that continues for as long as you live or over a set amount of time preventing the insurance company from keeping the balance if you die before receiving the entire contract value.
- Joint Life with Period Certain. A similar plan that applies the same protection of paying as long as you or your beneficiary are living, or over a set time period.
- Systematic Withdrawal. A set dollar amount or set percentage of the contract value paid out each year.
- Lump Sum. A single payment that liquidates the contribution, letting you either take all of the money in cash or roll it over into another annuity contract.
Taxes on Fixed Annuities
As long as you don’t withdraw your funds before you turn 59.5 for qualified annuities, the cash you invest in a fixed income annuity contract grows tax-deferred until you start taking distributions. Once you start collecting, the IRS will tax your payments the same way they would any other income. Non qualified plans disburse on a LIFO basis so the last in is the first out and treated that way for tax purposes. The tax rate is determined using a formula called the exclusion ratio, which distinguishes taxable income from tax-free income. You’ll get your principal back tax-free, but income and interest earned are taxable.
How safe are Fixed Annuities
The principal and interest in a fixed contract is backed by the financial strength of the life insurance carrier offering the product. Insurance companies are rated according to their financial strength and given a grade, such as AAA or AA. Most carriers have several ratings provided by each of the major rating agencies, such as Moody’s, Fitch, and Standard and Poor’s. Stable carriers obviously receive higher ratings, while smaller, less established companies are assigned lower grades. We do have restrictions on the annuities we offer, we will not offer and annuity from a company that is rated BBB or lower.
But state laws require that all fixed annuity carriers maintain a cash reserve that is at least equivalent to the total value of all outstanding fixed annuity contracts, regardless of what they are rated. This provides a safety net for all fixed annuity holders that can be counted on in times of financial turmoil similar to 2008. Reinsurance companies usually step in and cover customer losses whenever an annuity carrier becomes insolvent. Although fixed annuities are not FDIC Insured your chances of losing the money in one of these contracts are so low that this possibility can be ignored for all practical investment purposes.
For more information about Fixed Annuities and all of your options, click here.