Financial planning > An Annuities Primer

An Annuities Primer

Annuities are long-term investment tools for supplementing retirement income. There are no IRS-imposed annual contribution limits, and annuity earnings grow tax-deferred until the funds are withdrawn or paid out as income.Though popular among today's aging Baby Boomers and members of the Mature or "Senior" markets, annuities can be traced back to ancient Greece. The term "annuity" comes from the Greek word "annus"?or "year"?and refers to annual income payments. Similarly, in ancient Rome citizens would make one-time payments to a contract called "annua" in exchange for lifetime payments made once a year.In 17th century Europe, annuities were used as fundraising devices by governments to finance their ongoing wars with neighboring nations. These governments would offer "tontines," which promised payments into the future to those who bought shares.

In the 18th century annuities were introduced to North America, with private insurance companies selling insurance and annuity contracts to individuals wanting to avoid outliving their resources, In 1759 in Pennsylvania a company was formed to benefit Presbyterian ministers and their families. The ministers would contribute to a fund, in exchange for lifetime payments. In 1912, the Pennsylvania Company for Insurance on Lives and Granting Annuities became the first American company to offer annuities to the public. However, annuities experienced a huge growth in popularity during the late 1930s when the collapsing financial markets turned many people away from equities in favor of products from more secure institutions?insurance companies that could and did make annuity payments, as promised.Early annuities were simple contracts guaranteeing a return of principal and fixed rates of return from the insurance company during the accumulation phase. At withdrawal, the annuitant chose either a fixed income for life or payments over a specific number of years.

Buyers have always been drawn to annuities by their tax-deferred status. As a consequence of being issued by insurance companies, annuities have always been able to accumulate without taxes being taken out at year-end, which has added the time value of money to their list of advantages.The most recent major development has been the inception in 1952 of variable annuities, which offer the investment features of separate mutual fund accounts inside the annuity with the tax-deferral available from life insurance products. Variable Annuity owners choose the type of accounts to use, often receiving modest guarantees from the issuer in exchange for the greater risks assumed."The shift to investment-linked annuities has been so marked that 25,000 investment-linked annuities were sold [in 2001] - 9.5% of all annuity business," reports Peter Quinton is managing director of The Annuity Bureau, adding that "it's likely that the popularity of these annuity will continue to increase as they are the only at-retirement products that offer retirees a half-way house between the two extremes of purchasing a safe conventional annuity and opting for a investment-linked income drawdown plan, where the cross-subsidy system does not apply." Source: Pensions Management; 12/1/2002Wider ChoicesAlthough long part of well-diversified financial portfolios, annuities have continued to evolve. Recent developments have included features such as adding checkbook access to Variable Annuity funds, more attractive "bonus" rates, shorter maturity periods, and guaranteed death benefits. But consumers now have wider choices of annuity types, plus more investment options and guarantees to fit their investment and income goals.

For example, some annuities offer guaranteed bonus interest rates for the first few years or guaranteed returns for the life of the contract. Other annuities guarantee beneficiaries the return of principal if the annuitant dies and the annuity stock market investments have lost value.Although annuities have evolved, their primary objective remains the same. That is, being able to lock in a guaranteed payout that cannot be outlived. As people live longer, healthier lives--and the equities markets remain subject to unsettling fluctuations--financial products offering safety, flexibility and guaranteed returns are increasingly appealing to older consumers. However, investors of all ages are drawn to variable annuities whose return is tied to the stock market, but which also offer guaranteed minimum returns not tied to market performance.Annuities are accessible.

Because there are no contribution limits, people can invest as much or as little as they chose in annuities no matter what their income levels. And this money grows on a tax-deferred basis until the accumulated earnings are distributed, usually at retirement. Moreover, unlike other tax-deferred investments during the distribution phase, annuities' tax-deferred earnings are not counted in determining a person's income taxes on Social Security benefits. At the same time, while annuitants cannot outlive their guaranteed benefits, properly structured annuity contracts and beneficiary designations can: 1) avoid probate, 2) protect assets held in trust from mismanagement by a parent of guardians, and 3) continue benefits to the annuitant's heirs, thus making annuities effective multigenerational planning vehicles. Market OverviewWith their unique advantages, a growing market for annuities has grown among individuals with longer-term wealth accumulation and retirement planning needs, as well as individuals with immediate income needs.

Let's consider how two types of annuities can be used to address the wealth accumulation and retirement planning problems we all face. These are:? Non-qualified Annuities
? Qualified AnnuitiesNon-Qualified Annuities -- Non-qualified annuities are purchased with after-tax dollars to meet longer-term wealth accumulation or retirement planning needs--with emphasis on longer-term. As noted, deferred annuities may not be appropriate for shorter-term wealth accumulation purposes ? generally those that will materialize before age 59?; while immediate annuities are designed to provide long-term income ? that is, income guaranteed for life. Non-qualified annuities are used to fund cash accumulation programs that do not qualify for a front-end tax deduction; but whether an annuity is qualified or non-qualified, premiums always accumulate interest that is free of current income tax until withdrawn. But non-qualified annuities also allow owners to continue tax deferral beyond the age 70, the mandatory withdrawal age for traditional IRA's and qualified retirement plans.Qualified Annuities-- Annuities can also accommodate tax-qualified money.

A qualified annuity is used to fund a tax-qualified retirement plan such as a traditional IRA or an HR-10. Thus in most cases, premiums paid to qualified annuities are tax-deductible. For instance, when people change jobs and have 401(k) funds to move or already have IRAs and are seeking a more diversified portfolio. They can reduce their portfolio exposure by rolling the money over into an annuity without losing tax advantages.Or suppose Alice inherits $20,000. If she doesn't need the money right away and wants to build a long-term nest egg, she might consider putting the inheritance into an annuity.

By doing so, she'll gain the advantage of tax-deferral, and when it's time to withdraw funds from her non-qualified annuity, Alice will only be taxed on the accumulated interest, not the principal.Generally, annuities are not suitable estate planning vehicles, but are useful in meeting immediate and retirement income needs. Thus, iif you're a candidate for wealth accumulation and retirement planning, remember: "The only person who can take care of the older person we will someday be is the younger person we are now." Want More? Send questions and comments to w.willard3@knology.net.

Bill Willard has been writing high-impact marketing and sales training for the financial services industry for over 30 years. Through interactive, Web-based "Do-While-Learning?" programs, e-Newsletters and straight-talking articles, Bill helps agents and advisors get the job done: profitably improving performance, skipping expensive mistakes, and making the journey to success faster, smoother, easier. And fun!

Debt Free Living - 5 Tips To Get Out Of Debt

A few times I wonder what sort of credit system moved the global economy 200 years ago. If the intention of getting into a business is meant to 'help' fulfill the needs and wants of someone, I don't see how credit card salesmen can drove more people into debt and backruptcy. Clearly most people fail to have a good understanding of the increasingly sophisticated (and complicated) terms and conditions behind the card they apply for, how it benefits the bank more than the applicant and what the ubiquitous card is best used for.The 'cashlessness' of the advanced world surely works its illusions into the minds of those caught up in the disease of consumerism, who found it too easy to buy anything anywhere with a flash of the card without realizing the interest incurred to the bank everytime a purchase is made. Before you get the math right, you must get personal spending principles and habits right first, and only then you will attain self-awareness and a conservative mindset that lights...

Debt Free Living - 5 Tips To Get Out Of Debt

Financial planning > Debt Free Living - 5 Tips To Get Out Of Debt

World Financial News Network Decided to Recommend Automotive Capital Group -- Independent Analyst, WFNN Favors Automotive Capital Group ?For the Strong Earnings Future By Helping Sell GPS Systems and Auto Financings.

WFNN's consistently outperforms established industry benchmark indicators. Based on in-depth research and analysis, their analysts recommend securities worldwide showing the highest probability for stock price appreciation. With constant vigil, WFNN looks for economic opportunities in the private and public company sectors.Dr. Joseph de Beauchamp, WFNN's Chief Independent Analyst, said, "WFNN believes this is a good time to take a look at this company. There have been many important and exciting activities taking place that provide us with the confidence that Automotive Capital Group, Inc.

will move forward with an excellent chance for success. WFNN sees the stock moving soon to $3.00 per share in the next year and earning out one cent per share."For brief information of this new, dynamic company, examine: http://wfnn.info displaying in the search engine section.About WFNN: World Financial News Network provides a unique blend of data,...

Financial planning > World Financial News Network Decided to Recommend Automotive Capital Group -- Independent Analyst, WFNN Favors Automotive Capital Group ?For the Strong Earnings Future By Helping Sell GPS Systems and Auto Financings.

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Employee retention and motivation?why should employers care?
A storm is brewing.
National productivity was up 3.9% in the second quarter and 1.9% in the third quarter of 2004.
At the same time, the unemployment rate was up 5.5% in October 2004.
"Productivity is up, but fewer people are doing more," said Jennifer Loftus, SPHR, CCP, CBP, GRP, National Director, Astron Solutions.
"In addition, the number of 25-34 year old workers will decline by 2.7 million by 2008, resulting in a predicted shortage of 10 million workers within the next ten years."
According to the Society for Human Resource Management (SHRM), each employee who leaves a company generates a cost.

Conservative estimates place that cost at 30% of an employee's salary.
For example, an organization that loses and replaces 150 employees a year, each at an average annualized salary of $50,000, incurs an estimated turnover cost of $2,250,000 in one year.However,...

Spinning Gold from Straw: Low Cost Employee Retention and Motivation Tools

Financial planning > Spinning Gold from Straw: Low Cost Employee Retention and Motivation Tools

Christopher Reeve Brought More Security To the World While Suffering His Disability Than Superman Did In His Prime

With the strength of Superman he proved that trauma, hope after trauma and the love of family are all important. Christopher Reeve went on to encourage the world by facing a most restrictive disability and demonstrating that every breath he took could be used to enhance his life and the lives of others. "This was a most charitable and brave man" said Jossel Ginsburg CEO of Ginsburg Financial Services ? www.ginsburg.com.au and Business Caf? ? www.businesscafe.com.au , "Christopher could have hidden from the world but, he had the courage to use his misfortune to benefit others. In the years that follow Christopher Reeve's name will grow, especially in the financial services arena. Anyone and everyone is subject to physical risks and his name is now synonymous with insurance and medical science".

We extend our deepest sympathy to the Reeve...

Christopher Reeve Brought More Security To the World While Suffering His Disability Than Superman Did In His Prime

Financial planning > Christopher Reeve Brought More Security To the World While Suffering His Disability Than Superman Did In His Prime

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