While the standard features are automatically included in most annuity policies, you can control the premiums you pay and the benefits you receive when you select the type pf policy. In choosing the type of life insurance policy you purchase, consideration must be given to the need which is being filled. Below are descriptions of the most common types of policies, and tips on advantages and disadvantages.
A fixed annuity contract has a guaranteed minimum interest rate as well as projected interest rate. The three most common types of fixed annuities are the Single Premium deferred, Single Premium Immediate and the Flexible Premium deferred and within the two deferred types are four subcategories, they are the
1) Annually declared rate
2) Annually declared rate with a first year bonus
3) Multi-Year Guarantee (MYG)
4) Equity Indexed Annuity (EIA).
Although these four subcategories of annuities are all structurally different, they are all fixed annuities because they have minimum guarantees.
A variable annuity contract will increase and decrease in value based on how the market, which the premiums are invested, performs. These annuities do not have minimum guarantees or projected rates of return. When a registered representative is talking about potential returns on a variable annuity, the figures are all based on the past performance of the annuity. The sale of variable annuities is governed and regulated by the Securities and Exchange Commission (SEC).
Single Premium Annuities
A Single Premium Deferred Annuity (SPDA) is generally for people who have a single lump sum of money to deposit. This type is considered an alternative to CDs for people who do not have the money “earmarked” for use in the short term. Some plans have a current rate that is guaranteed for 1 year, but the most popular plans today are the CD Type Annuities also known as Multi-Year Guaranteed Annuities (MYG). MYG Annuities declare a guaranteed rate for a stipulated period of time (similar to CDs), and usually have a “surrender charge-free” window at interest renewal time in which clients can liquidate or transfer their values to another annuity, without the charges applying (again, similar to a CD that is renewing). Today, you can choose from products with guaranteed rates from 1 year to 10 years. See our “Annuity Product Details” section for some available annuities.
Flexible Premium Annuities
For people who want to make ongoing deposits to their plan, there is the Flexible Premium Deferred Annuity (FPDA)….. similar provisions to the SPDAs, but additional premium payments may be made any time you like, subject to minimum amounts and current interest. These flex plans are often used for IRA accounts, or to supplement other retirement plans. In a “tax qualified” plan, like an IRA, tax deferral is available in any approved vehicle (savings acct., CD, mutual fund, etc.), so the tax deferral is not the reason people would choose an annuity as their IRA product. More likely, it would be because of the guaranteed minimum return, and the guaranteed distribution options at retirement.
Call us when you have someone who needs to start an IRA, or if they want to look at rollover options for existing IRAs. There are millions of dollars in bank IRAs today getting 1% or so, and people just are not aware that they can get 3% or more with SAFETY. They can transfer the money to an annuity IRA, and benefit from higher returns, great distribution options, and/or both.
Equity Indexed Annuities
If you have clients who are conservative, don’t want to take a chance on losing principal, but they still would like an opportunity to grow faster than traditional plans allow, check out EIAs. These are also considered fixed annuities because of the guarantees in the contracts, but in certain situations, can outperform traditional fixed annuities.
The biggest difference between EIAs and traditional annuities is the method of crediting interest. In a traditional annuity, the insurance company determines what the rate will be. In an EIA, an outside index determines what will be credited to the values. For example, most EIAs today offer a choice of indexes such as the S&P 500*, Dow Jones*, and NASDAQ*. There are MANY variations on these products, and it can be confusing. So, give us a call, and let’s discuss what is your client’s best interest.
IMPORTANT NOTE: We offer many indexed annuities, but there is one from AVIVA Life that we feel is particularly “consumer oriented”. This is the Progessive Index Annuity product. It has most of the “bells and whistles” of other EIAs available, but we think it stands out because of their guarantees, unique “breakthrough” strategy”, and small number of “moving parts”. The “minimum guaranteed surrender value” (MGSV) of the plan, when held to term, equates to getting 1.50% (*or more) interest every year, on the money, WITHOUT subjecting the principal to market risk….. GUARANTEED!
10 Year Product – If held 10 years, MGSV is equal to 116%* of original premium.
(* States that have a “floating” minimum guarantee, like TN and MS, will generally have a higher guarantee which is established at the time of issue. The current minimum guarantee in those cases is 2.35% per year, which would increase the MGSV substantially!)
The MGSV is the lowest value your client could have at the end of the term, but if the index used to determine the interest rate does better than that, the client gets the higher method. So, with the Progessive Index Annuity from AVIVA Life, you can tell your client that they are guaranteed the return of their money plus 1.50% per year (higher in “floating rate” states), or the interest computed using the outside index, if higher.
Summary – EIAs offer the opportunity for clients to have the potential for market-type growth, with NO MARKET RISK of principal!
For more information on EIAs, give us a call!
(* Neither we, nor the companies we represent, are affiliated with any of these entities, nor are any products endorsed or guaranteed in anyway by these entities. EIAs are not securities, and do not require a securities license to sell. However, great care should be used when talking about EIAs with your clients because indexes are based on market changes. “Variable Annuities” ARE securities, regulated as such, and will not be discussed here. Call for more information.)
Single Premium Immediate Annuities (SPIA)
Another type of annuity that is widely used is the SPIA. In this case, clients contract with the insurance company for a series of regular income payments. They deposit a lump sum of money which then generates a monthly income based on their choice of settlement options, such as:
Lifetime income – payments continue as long as owner/annuitant lives.
Certain & Life – payments continue as long as owner/annuitant lives, and to a beneficiary if they don’t live a certain period (10,15, 20 yrs. etc)
Period certain – for a period selected by the client (10, 20 yrs. etc.), the company will pay the maximum amount depending on interest assumed for that period of time only.
Amount certain – the company will pay a certain amount selected by the client for as long as the money and interest lasts.
And there are a few more payout options as well, but those above are most often used. SPIAs can guarantee income for a lifetime to people who are afraid of outliving their assets, and that can be very comforting. They can also be setup to pay certain living expenses, such as insurance premiums for Long Term Care or Life Insurance.
Generally, on non-qualified money, a SPIA’s income will generage a large amount of tax-free income, because a large part of each payment is considered “return of premium paid”. If $100,000 is the premium deposited, and that pays out $150,000 over the desired period of time, then the “exclusion factor” (the part considered tax-free) is 66%. That means that about 2/3 of the monthly benefit paid out was “return of premium”, and not considered “profit”, and therefore not taxable. Only the $50,000 “profit”, representing about 1/3 of the monthly payout, would be considered taxable, and the company would send the client a 1099 each year on that amount.
In combination with an SPDA, a SPIA can create guaranteed, tax-advantaged income for a selected period while the deferred annuity grows back to the value of the original deposit (see “Split Annuity” sales idea below). This concept can compare very favorably to a client who has a CD, and withdraws just the interest each year.
Impaired Risk SPIAs – Because the SPIA payouts are based primarily on life expectancy, the health of the annuitant could affect the payout if the insurance company will actually “underwrite” the risk. So, a 70 year old who has the life expectancy of an 80 year old could benefit from a SPIA even more. We have companies that offer these plans. Call us for more information!