What Is An Annuity And Are They Right For Me?

There are many saving vehicles available today, your piggy bank, traditional passbook savings accounts, money market accounts, certificates of deposit, bonds … etc. Many people today still do not realize annuity products are also included in this list.

First, Let's Get Rid Of Some Negative Perceptions! I would like to speak to the most common misunderstanding among the general population about annuities.

You lose access to and control of your money in an annuity!

Annuities are risky investments!

The insurance company can go out of business and you will lose your money!

Let me tell you. Nothing could be further from the truth.

Annuities are contracts issued by insurance companies that grow tax deferred and offer a guaranteed rate of interest and guaranteed payout options. Access to your money within the annuity today is easier than ever, although many contracts still limit your penalty free withdrawal to 10% of the accumulated value per year. Recent changes in the industry make your money very liquid. Some companies even offer checkbook access. Some also offer a guaranteed income for life with out annuitization. That is an income stream that will never run out as long as you live. Additionally, the simple truth is not one person has ever lost a penny in an annuity due to a failure of an insurance company.

I will say you should keep in mind, the money you choose to place into an annuity contract should be only monies not needed for your daily expenses or any anticipated household needs or repairs in the near future. This is exactly what some of the uninformed have ignored, which has created some, if not most concerns about annuities.

Please be sure to always remember I told you this. "Use only what would be considered to be your" dusty money "in your long term savings plans, money you do not need to live"!

Now On To What You Really Want To Know! The key element I want to point out here is the interest earnings inside of an annuity contract / policy grow with a tax deferred basis unlike other traditional savings accounts and most investments. Taxes are paid only when the money inside of the annuity is withdrawn. Usually later in life at a lower taxable income rate.

There are several advantages of tax deferred annuities. Annuities offer very competitive returns that, most often exceeded CD's, money market and savings accounts. Unlike other savings accounts and investments, these competitive returns are deposited by taxes for as long as the earnings remain within of the annuity.

This is what gives tax deferred annuities their greatest advantage, the extra growth potential with the effect of triple compounding. What in the world is this triple compounding? Please let me explain …

Einstein once said, "Compound interest is one of the greatest discoveries made by man". Not only does your account grow with the interest earned in the first year. The new balance is now compounded by and grows with the accrued interest added and therefore grows on the new total total in each of the consequent years. Simply put, you earn interest on your interest or "Compound Interest".

Now add to this, "Tax Deferral", and you will see how you are also approaching interest on the monies that, with most other savings and investment vehicles, would have been lost to taxes levied on the interest gain each and every year.

Basically what you now have is interest on your balance plus interest on earned interest plus additional interest on your new found tax deferred gain.

(Interest on Your Original Deposit) + (Interest on Interest Earned) + (Interest On The Tax Deferred Monies You Sill Have) = (Triple Compounding Effect). WOW!

This goes on each and every year and if no withdrawals are made this money grows at an unbelievable rate.

This concept works well with all "Fixed Rate Annuities" where you are guaranteed a fixed rate of return each year of your contract. Just right for "CD Lovers" and those of you who need to know exactly where you are and where you are going at all times.

Now, if you are the type of person who enjoys a bit more of a gamble, but still will not tolerate risk of loss to any of your principal. The "Equity Indexed Annuity" may be right up your alley.

With the "Equity Indexed Annuity", not only are you guaranteed a minimum interest rate of return, you may also select any portion of your account balance to be linked, in part, to market gains. This gives you the potential of additional earnings as the market rises, with the added protection of and the security in knowing your gains are locked in and you do not lose when and if the market goes down.

You also have flexibility with your choice of Indices, such as the S & P 500, the Dow, Nasdaq and 10 year treasury bonds. You also have choice as to credit methods, annual point to point, monthly point to point, monthly averaging, among others.

Seek the advice of a Qualified Professional to help you with how these choices may affect your individual situation. Remember, there is really no one size fits all here.

There are also annuities that offer a bonus to your initial premium (s), which are credited rates of interest, usually in the first few years of the contract, in addition to the current rate of interest. In some cases the additional bonus rate can be as much as 10% or more. It is not uncommon for people to experience better than 14, 15 and even 16% in the first year with certain policies. Also very suitable for retirement plan rollovers or if you wish to switch from a product that is not performing as you had hoped to a more favorable one. It can surly help ease the effect of penalises incurred upon a 1035 exchange.

A word of caution here! Be extremely careful when allowing someone to complete what is considered an "IRS 1035 Exchange". Even though this allows moving from one policy to another like policy, not all replacements would need to be the right move for you. Remember these transactions often create a large commission check to the annuity producer, and believe me when I say, "Not All Salespeople Out There Are Working In Your Best Interest".

Know who you are dealing with, check them out and never make a hasty decision. Even though you have, by law, time to review and change your mind with any insurance purchase, be sure to not let what looks to be a very nice man or woman allow you to make this type of purchase on their very first visit. Ask them to come back in a few days and if they debit this with you, this should put up a Giant Red Flag for you to see.

Please note, this group of unscrupulous individuals is certainly a small minority, but I feel compelled to bring this issue to your attention. Insurance companies are actively pursuing this issue with comprehensive suitability questions required to be submitted with all new business. I applaud this action by the industry, as any means of protecting the general public and especially our maturing population from abuse is most welcomed by me as a CSA.

Your Best Course Of Action Would Be … To seek out a Qualified Licensed Professional in your area. Set a time to meet and get acquainted. Then and only then, if you feel comfortable with this person, review your current situation, ask all of your questions, and then some. Listen closely and above all be sure you understand fully the answers to your specific concerns. If not ask for further clarification before you move on. He or she will certainly not object to this, for it shows your level of interest and it is the job a true professional to make sure you understand everything.

For those of my readers in Pennsylvania, I would be most happy to speak with you on the phone, meet with you in my office or if you would feel more comfortable, in your home if you prefer. At that time we would be able to get to know one another and go over your individual situation.

This Is My Promise To You! During my initial review I will be thorough, sensitive to your concerns, questions and respectful of your time. We will then be able to set a convenient appointment time to get together again to address my findings. There I can present all of the areas of concern which I have uncovered and perhaps reveal some not radially similar to you. I will fully answer and explain all of your questions and share with you possible solutions. If I am fortunately enough to find no concerns, rest assured, I will gladly share that with you as well, along with a pat on the back.


Source by E. Shel Yetman

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