Many clients ask me “What is an Annuity?” An annuity is defined as a contract or agreement between an individual party, trust, corporation and a financial institution to hold funds and return such funds on a specified basis to the annuitant at some point as agreed to in a policy or contract between the two parties.
In simpler terms.. A client can place funds (premiums) with a company in an annuity and the company agrees to allow the funds to grow and repay the funds to the client as using the rules outlined in the annuity contract. Annuities or the idea of them have been in use for thousands of years as a way to repay parents for wealthy individuals that offered apprenticeships to children of poor parents even before the time of the Roman Empire.
There are many laws and regulations that govern the use and sales of annuities. These are to insure the proper use of and benefit to the clients. Annuities are not FDIC insured…insurance companies are NOT banks and funds that are placed into annuities are NOT considered DEPOSITS but are rather considered PREMIUMS. This is important to understand and is a benefit to annuity clients. Annuity premium dollars are closely monitored by each state division or department of insurance as to how and where those dollars are re-invested to return a fair growth in a safe and long term manner for return of those dollars to annuitants later on.
The safest type of annuities are FIXED and or INDEXED annuities. These provide tax deferred growth on funds (Premiums) based on an agreed to interest rate or an allocated percentage of growth based on the growth of an outside basis or market index. NO FUNDS are ever invested in stocks or volatile markets. 100% of the premium dollars a client places into a Fixed or Indexed annuity works to earn growth. There are no up front fees, commissions or “Loads” to be concerned with. As long as a client abides by the annuity agreement for Free withdrawals, loans etc. to access the funds, no penalties will ever be realized.
Normally, when a properly designated beneficiary is named, the original funds of an annuity can transfer to the beneficiary avoiding probate and income taxes or estate taxes at the annuitants death. Only the growth can be taxed as per current understandings. (We are not tax or legal advisors. Please consult a tax advisor or attorney for your specific situation.)
Annuities can be used a retirement savings, estate planning, wealth transfer, 401K rollovers, Other qualified retirement plans as IRA, Simple IRA, SEPs, Roth etc.
There are various types of Fixed and Indexed Annuities and they are offered for applicants at various minium premiums required. Some as little as $20 per month. Others require $5,000, $10,000, $25,000 and even $100,000 minimum to open. A suitability form is required by all applicants to determine if the annuity is good policy for the client. This is required by all states and all companies and requires the disclosure of a clients assests at the time of application.
To determine if an annuity is right for you, call Ed and discuss.