To find and utilize the best Annuity Strategies for your needs and goals, it’s important to get some clear understanding of the different types of annuity products and how they work. All annuities can be classified under one of the following categories:
Once you have a clear framework of the different types of annuities, we can move on to how to utilize an annuity or combination of annuities, to achieve your financial goals. That means looking at some carefully crafted Annuity Strategies that will give you the comfort of knowing you got a personal-best annuity plan. Strategies to consider include:
INCOME ANNUITY (SINGLE PREMIUM IMMEDIATE ANNUITY –SPIA)
This is the original annuity design. At Stan the Annuity Man we employ independent research to find the best-of-the-best annuities in all categories. The salient facts about an Income Annuity are these:
- Guaranteed lifetime income starts 31 days from the contract being issued;
- There is full transfer of risk to the insurance company to pay you a guaranteed income stream for your full life or for your and your spouse’s lives;
- It is fully customizable – you choose the structure of the contract (life, life with period certainty, life with cash refund, etc.);
- You can add an annual Cost of Living/Inflation (COLA) percentage increase to the policy.
Terminology and features:
- “Annuitization” describes the payout of an Income Annuity;
- Annuitization is when you provide an insurance company with a single payment, and in exchange for that lump sum payment the insurance company provides you with regular income payments at intervals determined by you – generally the rest of your life;
- There are no fees or costs;
- Payments can be wired directly to your bank.
FIXED RATE ANNUITY (CD TYPE)
This annuity type pays a fixed contractual rate for a specific period of time, just like a CD pays a fixed interest rate for a set period of time. Facts and features you should know about a Fixed Rate Annuity:
- It can be purchased for guaranteed terms as short as two years and up to 10 years or more to receive the contractually guaranteed rate;
- Unlike a CD, the taxes on the interest earned are deferred until the money is withdrawn;
- A Fixed Rate Annuity can be converted into an Income Annuity (see previous description) at the end of the contractually fixed term;
- You retain full control of your money;
- Principal is guaranteed against loss;
- There are no fees or costs;
- Interest payments can be wired directly to your bank.
FIXED INDEX ANNUITY – Equity Indexed Annuity
The Fixed Index Annuity is structured with a call option on an index such as the S&P 500, NasDaq, or DJIA. Call options are usually one or two years in length. Here are some facts and features about this type of annuity:
- This type of annuity is protected from any market loss because call options will expire worthless if the specific index goes down in value;
- Any gains you earn will “lock in” never to go below that amount;
- Other benefits are usually added as “riders” such as guaranteed death benefit growth, Long Term Care or confinement coverage, and contractually guaranteed lifetime income stream options;
- Taxes on gains are deferred until money is taken out;
- Costs are very low when compared to Variable Annuities which are the next to be discussed.
The Variable Annuity structure offers mutual fund choices as your investment option. Variable Annuities need to be constantly monitored by you and fees do apply. Here are facts and features to be aware of:
- Fees normally range from 1.5% up to 5% per year;
- This annuity needs to be constantly monitored because investments are subject to losses;
- In most cases Variable Annuities are not suitable or appropriate for seniors due to high fees and potential market loss;
- They are also not suitable for seniors, or other investors, if they do not want to actively manage internal mutual fund choices;
- Taxes on gains are deferred until the money is taken out.
At Stan the Annuity Man it is our position that generally you can achieve the same goals with less cost and no risk by utilizing one of the fixed annuity structures rather than choosing a variable annuity.
CHARITABLE GIFT ANNUITY
The Charitable Gift Annuity can be described as a transaction in which an individual transfers cash or property to a charitable organization in exchange for the charity’s promise to make fixed annuity payments to one or two people. Charitable Gift Annuities are usually not issued for a fixed term of years. I work with the American Council on Gift Annuities which was established in 1927 to ensure that everything is done within proper legal guidelines.