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Prestige Insurance Group, Inc.

Piggy BankDo annuities belong in your retirement portfolio? If you're looking for a guaranteed revenue stream, consider the following pros and cons to decide if an annuity is a good investment for your retirement portfolio.

Understanding Annuities


When you buy an annuity, you're buying an investment that provides regular payments over time. The annuity buyer (the annuitant) makes a lump-sum payment or series of payments to an insurer. In return, the insurer agrees to repay that investment, along with interest and/or gains (if any) in installments. The insurer will use your life expectancy as a factor in determining the annuity's payout.
The payout period can begin immediately (as with an immediate annuity) or at a specified time in the future, and will last a specified time as defined by the contract.

There are three types of annuities:
  • Fixed annuity. The insurance company promises you a minimum rate of interest on your investment and a fixed periodic payment. Payout amounts depend on your investment, the annuity's interest rate and your life expectancy.
  • Variable annuity. The insurance company allows you to direct your annuity payments to different investment options, usually mutual funds. Your payout will vary depending on the rate of return on your investments.
  • Indexed annuity. This annuity combines features of securities and insurance products. The insurance company credits you with a return based on a stock market index, such as the Standard & Poor's 500 Index.

Pros


Tax-deferred growth. During the annuity's accumulation phase, you pay no taxes on the income and investment gains on your investment.

Flexibility. When you buy an annuity, you select when you want the payout period to begin and how long you want it to continue. Payouts can last a lifetime (such as yours or your spouse's), so you will always have a guaranteed source of income.

Death benefits. If you die before you start receiving payments, your beneficiary receives a specific payment.

Guaranteed returns. With a fixed annuity, your investment will pay the minimum rate of return stated in the contract. Although any investment entails risk, fixed annuities are regulated by state insurance departments, which require insurers to maintain reserves adequate to pay their contractual obligations.

Cons


Taxation on withdrawals. Although you pay no taxes on earnings growth during the accumulation phase, you will owe taxes on investment gains when you receive withdrawals. Gains are taxed at ordinary income rates, rather than at the lower capital gains rate.

Early withdrawal penalties. Withdrawing money early from an annuity can cause you to lose a substantial amount of your investment to fees and penalties. For this reason, individuals who might need the funds during the accumulation phase should consider other investments instead. Insurers charge substantial surrender fees if you withdraw funds before the payout phase. In addition, if you withdraw money from an annuity before you reach age 59 ½, you may have to pay a 10 percent tax penalty to the Internal Revenue Service on top of any taxes you owe on the income.

Fees. Fees will affect the returns on your annuity investment. Most fixed annuities don't charge fees, other than perhaps a small annual policy fee. The insurer builds the cost of servicing your annuity into the spread between the annuity's guaranteed interest rate and the rate the insurer earns on its investments.

Variable annuities do charge several annual fees. These include a mortality and expense risk charge, which pays the insurer for the insurance risk it assumes under the annuity contract. You will also pay administrative fees, which cover the insurer's recordkeeping and administrative expenses. The mortality and expense risk charge generally equals a set percentage of account value, such as 1.25 percent; while administrative fees may be a flat fee or percentage of the account value. Initial sales loads, fees for transferring funds from one investment option to another, and other fees also may apply. In addition to the fees you will see on your statements, you will also indirectly pay the fees and expenses imposed by the mutual funds that are the underlying investment options for your variable annuity.

Risk. Any investment entails risk. With a variable annuity, your account value may decrease if the underlying mutual fund investment options perform badly. With a fixed annuity, your investment might not keep pace with inflation. And it's rare, but insurance companies can fail. Unlike certain bank investments, no federal program insures funds invested in an annuity. Your state's guaranty association might provide some protection, but that protection is limited to a maximum of $100,000.

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Get the financial protection you need. Call Prestige Insurance Group, Inc. at (305) 969-8776 for more information on Miami annuities.

(Article Courtesy: The Insurance 411)
Posted 9:00 AM

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