1. The Annuity Advantage By Blue Horizon Insurance & Financial Services
Washington
In evaluating financial products for your retirement dollars, there are a multitude of choices to consider. One of the most powerful solutions for long-term retirement savings can be the fixed annuity.
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2. What is an annuity?
An annuity is a contract with a life insurance company that provides certain benefits in exchange for a deposit of money, known as a premium. Annuities are not life insurance policies.
Let’s start our discussion by discovering what an annuity is. An annuity is a contract with a life insurance company that provides certain benefits in exchange for a deposit of money, known as a premium. Annuities are not life insurance policies.
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3. Types of Annuities Traditional Fixed Annuities
Earnings are generally based on a stated rate, guaranteed for a period of one year.
Multiple-Year Guarantee Annuities
Earnings are generally based on a stated rate, guaranteed for a set number of years.
Fixed Indexed Annuities
Earnings are generally linked to the performance of external index, like the Nasdaq-100® or S&P 500® index, while providing a minimum guarantee.
Variable Annuities
Earnings are generally based on investment options, such as stock or equity markets.
May lose value when the investment option suffers market losses.
Several annuity types are available:
Traditional Fixed Annuities—Earnings are generally based on a stated rate, which is usually guaranteed for a period of one year.
Multiple-Year Guarantee Annuities—Earnings are generally based on a stated rate, guaranteed for a set number of years.
Fixed Indexed Annuities—Earnings are generally linked to the performance of an external index, such as the Nasdaq-100® or S&P 500® index.
Variable Annuities—Earnings are generally based on investment options, such as stock or equity markets. These annuities can often lose value when the investment option suffers a market loss.
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4. Investment Pyramid Stocks and Derivatives
Variable Annuities and Mutual Funds
The idea behind the investment pyramid is that safe money (fixed accounts) provides the strongest foundation for your savings. Typically, “safe money” is money that cannot lose value. This includes financial products such as CDs, savings accounts, money-market accounts, fixed and indexed annuities, and whole and universal life insurance.
The center of the pyramid includes variable products, which can help you diversify your risk. These products are intended to provide higher rates of return but can also subject your principal to the risk of loss. These products also typically include fees and expenses and are sold by registered representative professionals. Examples of these products include mutual funds, variable annuities, and variable life insurance.
At the top of the pyramid are products that are intended to provide the greatest risk/reward trade-off. Typically, these products are used only by investors who have a higher risk tolerance. Because of the risk inherent with these products, they should be purchased only with money you can afford to lose. Examples of these products include stocks, bonds, futures, options, and other derivatives. Only securities-licensed professionals are qualified to discuss these products with you.
CDs, Savings, Fixed Annuities, Fixed Indexed Annuities
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5. https://bhifs.com/annuity-retirement-planning/
Why an annuity?
Safety.
Flexibility.
Earnings potential.
Protection.
Annuities by their very definition are designed to provide income. Future income is the ultimate goal of annuity features such as accumulation and tax-deferral (which applies until you withdraw the money). However, annuities have the flexibility to provide current income as well.
Safety—Safety is a fundamental benefit of annuity products. Unless you choose to incur a surrender charge, you cannot lose money with a fixed annuity. A surrender charge is assessed for premature surrender of an annuity or excess withdrawals. Products that are held for the duration of the agreed-upon time frame, without excess withdrawals, are not subject to surrender charges.
Flexibility—In addition to standard contract provisions, annuities available to today’s consumers offer a great deal of flexibility and choice. This includes the availability of waivers and optional riders that can help you tailor the annuity to fit your individual financial objectives and needs.
Earnings potential—In most situations, because insurance companies invest long-term assets for long-term yields, their credited rates of return for consumers can be higher than other options available for short-term dollars. In addition, product innovations developed over the past 15 years mean consumers can now choose from guaranteed rates, interest linked to changes in an external index (while protecting principal), or a combination of both.
Protection—Annuities offer protection in several different ways. We will explore them all—from protection against market loss, current taxation, and market fluctuation to protection from probate, creditors, and changes in physical health.
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6. From Feature to Benefit
Tax deferral*
Triple compounding of interest
Minimum guarantees
Safety and security
Beneficiary designation
Avoidance of probate**
Annuitization†
Guaranteed income
Control
Choice and flexibility
Death benefit
Leave a legacy
Withdrawal provisions††
Income flexibility
Premium bonuses
Offset investment losses
Optional riders
Protective solutions
Crediting methods
Choice, ability to change based on needs
From Feature to Benefit
Annuities offer many features. And while features are important, it is important to consider how you will benefit from these features. We will address each of these features and benefits as we go through this presentation.
* Taxes are deferred until withdrawals are taken, and tax deferral is available only to individuals or to entities that benefit individuals, such as certain trusts. Under current law, tax deferral is a basic feature of tax-qualified plans. Placing qualified funds into an annuity does not provide any additional tax benefit.
** The beneficiary must be living at the time the benefit is payable, subject to the terms of the annuity contract. Avoidance of probate can also be a benefit of some non-annuity financial products, such as a paid-on-death account, where a beneficiary is named.
† Requires election of settlement option. See annuity contract for details and restrictions.
†† Withdrawals may be subject to income tax and IRS penalty tax if made before age 59½.
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7. Tax Deferral Feature—Tax Deferral: Benefit—Triple Compounding:
Exists as a function of current law and has no explicit cost.
Allows you to control when you pay taxes on contract gains.
Benefit—Triple Compounding:
Interest on principal.
Interest on interest.
Interest on dollars that otherwise would have been paid in taxes.
Under current tax law, annuity gains are not taxed until they are distributed. This allows you to control when you pay taxes on these earnings. (Tax-qualified plans require minimum distributions starting at age 70½.)
Tax deferral allows you to enjoy the benefits of what is known as triple compounding. You earn interest on your principal, your interest, and on the dollars you otherwise would have paid in taxes. Albert Einstein is credited with coining the phrase, “compound interest is the most powerful force in the universe.” Imagine if he had known of triple compounding!
Placing qualified money in an annuity does not provide any additional tax deferral benefit.
Taxes are deferred until withdrawals are taken, and tax deferral is available only to individuals or to entities that benefit individuals, such as certain trusts. Under current law, tax deferral is a basic feature of tax-qualified plans.
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8. Minimum Guarantees Feature—Minimum Guarantees:
Contractual minimum guarantee:
A minimum interest rate guarantee that applies over the life of the contract.
Represents the worst case scenario.
Current interest rate guarantee:
May be a stated interest rate or multiple-year guaranteed interest rate.
Minimum guarantees form the backbone of the fixed annuity. There are different guarantees within the annuity contract—including the contractual minimum guarantee. This guarantee applies over the life of the contract. In the worst-case scenario, where there is no contract growth, the contractual minimum guarantee protects your principal from loss.
Many annuities offer a guarantee of 1–3% on 87.50% of premium over the life of the contract (this percentage differs by contract; refer to the specific contract for details). Should the contract be surrendered prior to the expiration of the surrender charge period, the greater of the original premium, plus any gains, or the contractual minimum guarantee would be applied to the surrender charge formula. In simple language, if the product is held for its full intended term, it is very unlikely that the minimum guarantee would come into play unless there is no growth at all in the product. In that case, the minimum guarantee does its job by providing safety.
Some products also guarantee a specific rate for a specific time period. This type of guarantee is called a current rate guarantee.
Fixed annuities guarantee a minimum interest rate on all or a percentage of each contribution over the life of your contract, less any withdrawals and/or deductions and early surrender charges. Guarantees are based on the claims-paying ability of the insurer.
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9. Minimum Guarantees (cont’d)
Benefit—Safety and Security:
No market loss.
Insurance company financials.
Comparison of FDIC to insurance company safety.
Guaranty association.
Protection from market fluctuation.
Insurance companies invest long term and hold conservative investment portfolios.
Discussions about long-term retirement products often center on the security these products offer consumers for their retirement assets.
There are many ways to analyze the safety of an insurance company. It is a state insurance regulator’s responsibility to protect policyholders and ensure a healthy, competitive market for insurance products. Strict solvency standards and keen financial oversight, based on conservative investment and accounting rules, continue to be the bedrock of state-based insurance regulation.
One way to look at the financial strength and stability of an insurance company is to consider the company’s assets and reserves. We can provide you with material outlining the strength and stability of each insurance company whose products we recommend as a solution for your financial objectives and goals.
Fixed annuities and fixed indexed annuities all offer a minimum contractual guarantee. While these guarantees vary by company and product, their basic function is to guarantee that consumers do not lose money over the term of their contract. In some cases, these guarantees may offer a minimum guaranteed increase in the value of the premium payment.
While it is difficult to draw a direct comparison between the safety offered by annuity products and the safety of FDIC-insured deposits, there are some basic differences you should understand. An annuity’s contractual guarantees offer consumers the peace of mind of knowing that 100% of their principal is protected and that they will earn a minimum interest rate. In contrast, FDIC insurance covers only up to $250,000 per owner until January 1, 2010, when it reverts to $100,000 per owner. Ask yourself, “Do I have life insurance?” “Do I have car insurance?” “Do I have home insurance?” “Do I have health insurance?” If you trust your life, car, home, and health with insurance companies, why wouldn’t you trust your money with them?
Most states have a guaranty association that protects consumers in the unlikely event an insurer becomes insolvent and is unable to honor its commitments. There are generally limits to the amounts the guaranty association will cover, and certain residency criteria must be met. Check with your state for specifics.
Safety from market fluctuation means that consumers will not lose any principal, or even previously credited gains, in their annuity contract, should the stock market experience a drop (unless they choose to surrender or take an excess withdrawal).
Insurance companies invest their clients’ long-term dollars in long-term investments. The higher yields on long-term money, coupled with the advantages of tax deferral, mean that consumers may be significantly better off in the long run with their retirement dollars in annuities, depending on their personal financial situation.
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10. Beneficiary Designation
Feature—Annuities pass to the beneficiary at death:*
Spouse listed as sole primary beneficiary:
Can assume the contract and continue the tax deferral (spousal continuance).
Can take over the death proceeds as his or her own IRA (spousal IRA).**
Living beneficiaries of IRA:
Can “stretch” the IRA over their lifetime and potentially multiple generations to reduce tax implications.
Benefit—Assets can avoid the public, costly, and time-consuming process of probate.
Because annuities are insurance products with beneficiary provisions, the death benefit can pass to named living beneficiaries without the vagaries of probate. The death benefit passes via the contract and isn’t subject to the will or estate settlement process, unless the estate is named as the beneficiary.
With IRAs, it is important to ensure that the beneficiaries are named individuals who are living, if the goal is to establish a stretch IRA (making the required minimum distributions last up to three generations).
* Refer to the annuity contract for details regarding qualifying death.
** Not available with all companies.
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11. Annuitization
Feature—A contract provision that allows you to convert your annuity into a guaranteed income stream:
Can be elected, but does not have to be.
Can provide a variety of settlement options, including:
Income for life or a joint life.
Period certain (5-20 years).
Combination of the above .
Benefit—Can help protect you from outliving your income and provide tax-advantaged income on nonqualified monies.
Some annuity contracts require annuitization, but most leave that decision up to the owner of the product. While you do not need to annuitize to receive money from an annuity, annuitization allows you to receive tax-advantaged income (via the exclusion ratio). When you elect a settlement option, each payment is part principal and part interest, so you pay less in taxes than you would by taking a withdrawal, which would be considered 100% taxable income. You can choose from a variety of settlement options to meet your specific goals.
Refer to specific contract for options available.
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12. Control Feature—You can control:
Distribution of death benefit.
When to pay taxes on annuity gains.
Which crediting strategies to choose.
If and when to take income.
Annuity duration.
Premium bonus type and amount.*
Which riders to elect.
Benefit—a great deal of choice and flexibility.
With a variety of flexible options, strategies, riders, and other opportunities, annuities offer consumers a tremendous amount of control. Consumers can control:
Distribution of the death benefit—Owners can specify and change their primary and contingent beneficiaries. They can also limit the settlement options available to their beneficiaries via a letter of instruction specifying a restricted beneficiary designation (please check with the insurance carrier, as not all companies allow this).
When to pay taxes on annuity gains—To a certain extent, consumers can also control when they pay taxes on their annuity contract gains. While all qualified money requires minimum distributions beginning at age 70½, non-tax-qualified annuities and Roth IRAs do not, so consumers who own these products can continue to enjoy the benefits of tax deferral. The only two times when an annuity must be distributed (and taxed, with certain spousal exceptions) is upon death and maturity (typically at age 100).
Which crediting strategies to choose—Many annuities offer several crediting methods and allow consumers to control when and how often to allocate their premium. Consumers can also control when to reallocate funds to other strategies within the product. This flexibility allows consumers to change their allocation as their financial situation changes.
Consumers also have control over if and when to take income, annuity duration, premium bonus type and amount, and which riders to elect.
* May not be available with all products. Please check with specific insurance companies.
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13. Death Benefit Feature—Death Benefit:
Many annuities offer a full-value-at-death provision.*
Some annuities offer a death benefit rider that can offset the beneficiaries’ federal income tax burden when they inherit the annuity.
Settlement options are also available to beneficiaries.
The surviving spouse may continue the contract or assume the decedent’s IRA.**
Benefit—Helps you leave a legacy and optimize flexibility for your beneficiaries.
The death benefit provision of an annuity is designed to provide liquidity in the event of the owner’s death. While not all annuity products offer full value at death, many do and will waive surrender charges if the owner dies, allowing beneficiaries to receive the full accumulated value. It is also important to note that, in most cases, a spouse who is named sole primary beneficiary can continue the contract (in the case of nonqualified money) or assume the decedent’s IRA as if it were his or her own.
There are some riders that provide an additional death benefit designed to offset or lessen the beneficiaries’ tax burden when they inherit a nonqualified annuity. Since nonqualified annuities offer triple-compounding and do not require distributions at any age, the deferred tax on gains can be quite substantial. This type of rider can make a significant impact on the amount beneficiaries receive.
Many of the settlement options available to owners are also available to beneficiaries. These options can provide income for a single or joint life or for a period certain.
* Refer to specific annuity contract for details.
** Subject to limitations and restrictions by the IRS.
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14. Income Now or Income Later
Feature—liquidity provisions:*
Income now via surrender charge-free withdrawals.**
Income later via annuitization.
May be fully liquid at death.
Liquidity upon confinement.*
“Checkbook” access.**
Optional riders:
Income riders.
Additional benefit riders.
Death benefit riders.
Benefit—income flexibility.
There are many ways to access a fixed annuity without incurring surrender charges. Although annuities are designed to accumulate assets and defer taxes until a future date, most annuities offer various access features, giving consumers the flexibility to respond to changing financial needs.
One example is the ability to take penalty-free withdrawals of a percentage of the annuity value—typically up to 10%—each year for current income. Sometimes, this liquidity is available during the first contract year.
Most contracts feature the ability to annuitize at a later date, but some require annuitization to avoid a penalty. Most tax-deferred annuities today allow annuitization as an option. Annuitization occurs when consumers purchase an income stream from the insurance company in exchange for the accumulated value of their deferred annuity.
Some death benefit provisions allow beneficiaries to receive the full value of the product upon the owner’s death.
If an owner is confined to a nursing home, hospital, or hospice facility, surrender charges may be waived in full or in part to allow access to the accumulated contract value. Called a confinement waiver, this annuity provision gives consumers surrender charge-free access to their money when they may need it most, helping them to deal with expensive medical care. In addition, some riders provide an additional annuity benefit if the designated annuitant is unable to perform certain activities of daily living.
In an emergency, consumers may be able to access their annuity values via “checkbook” drafts made payable to their bank.
Several optional riders may be available to help generate income or protect the overall financial well being of consumers. These include income riders, which can generate income for life; health riders, which can protect consumers by providing additional dollars when their health declines; and death benefit riders, which can ensure a tax-efficient transfer of wealth to beneficiaries.
* Varies by product. Refer to annuity contract for specific details and limitations.
** Withdrawals may be subject to income tax and IRS penalty tax if made before age 59½.
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15. Premium Bonuses* Feature—optional bonus available on some annuities:
A vested bonus can add additional dollars that you own immediately.
Benefit—Can help offset market losses, increase annuity value or first-year interest crediting, and generate additional income.
Premium bonuses have become very popular as a means to offset market losses and bolster earnings. While premium bonuses have trade-offs, having a premium bonus can be an important way to increase annuity income or immediately recover losses or increase balances. There are different types of bonuses, including recapture bonuses, which are not vested and can be taken back by the insurance company. Be sure you understand the difference between vested and non-vested bonuses.
* Refer to contract for details.
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16. Optional Riders Feature—optional riders: Death benefit riders:
Living benefit riders:
Optional income-for-life riders.
Additional benefit riders (to provide additional money when certain life events occur).
Death benefit riders:
Designed to offset beneficiaries’ tax liability on deferred gains.
Liquidity riders:
Provide additional liquidity.*
Benefit—income for life, protection from health costs, and minimized tax liability for beneficiaries.
The advent of innovative riders has allowed annuities to provide solutions to life events in ways they never could before.
Living benefit riders can offer guaranteed income, and some can make additional dollars available to consumers faced with health-related financial challenges.
Death benefit riders can help beneficiaries offset the tax liability associated with inheriting an annuity.
* May provide liquidity in exchange for a lower interest rate. See contract for details.
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17. Crediting Methods Features—crediting methods:
Current interest rate guarantee:
Rates are guaranteed for one year and can vary upon renewal.
Multi-year guarantee:
Rates are guaranteed for a specific time frame, typically 3, 5, 7, or 10 years.
Index strategy:
Gains are linked to an external index, such as S&P 500®.
Gains are credited via a variety of calculation methods, such as annual reset, point-to-point, monthly average, monthly cap, blended index.
Benefit—choice, earnings potential, guaranteed rates, or a combination of all three.
Annuity crediting methods determine the amount of interest credited to the contract.
Current interest rate guarantee—One crediting method available is the current interest rate guarantee. Generally, this rate is determined for the first year of the contract and is what the company expects to pay consumers in subsequent years (although the rate doesn’t apply to subsequent years). This rate may be influenced by a variety of factors.
Multi-year guarantee—As its name implies, a multi-year guarantee rate applies for a specific time period, typically 3, 5, 7, or 10 years. The insurance company knows what it expects to pay during this period, and consumers know what they can expect to receive.
Index strategy—In exchange for a lower guarantee, this strategy offers greater upside potential and no downside risk. Although consumers’ dollars are not invested directly in an index, interest paid is determined by applying a formula (crediting method) to the change in an external index, such as the S&P 500®. The formula, or moving part, can vary significantly depending on the specific annuity product.
“Standard & Poor’s®”, “S&P®”, “S&P 500®”, “Standard & Poor’s 500” and “500” are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the issuing insurance carrier. The Product is not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of purchasing the Product.
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18. CDs Compared With Fixed Annuities
Interest is taxable.
Historically low rates.
Often limited liquidity.
Subject to probate.
Can be subject to creditors.
Annuities
Tax deferred.*
Upside potential.
10% surrender charge-free withdrawals with “checkbook.”**
Not subject to probate.†
May not be subject to creditors.††
Additional protective solutions available via riders.§
Taxable alternatives such as CDs have many advantages; safety among them. But tax-deferred annuities offer many advantages over CDs, as this table shows. For example, “tax deferred” means no income taxes are due until you withdraw funds from your annuity. Innovative crediting strategies give you more upside potential, and liquidity options let you withdraw your money without paying a penalty. Plus, annuities can offer you protection from creditors and from probate, and optional riders give you extra flexibility to meet your needs.
Based on general understanding of the basic features of CDs and fixed annuities; current features and benefits may vary.
* Taxes are deferred until withdrawals are taken, and tax deferral is available only to individuals or to entities that benefit individuals, such as certain trusts. Under current law, tax deferral is a basic feature of tax-qualified plans. Placing qualified funds into an annuity does not provide any additional tax benefit.
** Withdrawals may be subject to income tax and IRS penalty tax if made before age 59½.
† The beneficiary must be living at the time the benefit is payable, subject to the terms of the annuity contract. Avoidance of probate can also be a benefit of some non-annuity financial products, such as a paid-on-death account, where a beneficiary is named.
†† In certain states. Consult an attorney in the state of resident for creditor proof protection.
§ Assuming annuitant qualifies for benefit.
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19. Power of Tax Deferral Over Time
As this chart shows, tax deferral gets stronger with time, allowing you to capitalize on the power of triple compounding!
Assumptions
Premium
$100,000
Annual Crediting Rate 4%
Federal Tax Bracket
28%
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20. Equivalent Yield of Taxable Account vs. Tax-Deferred Annuity
4% tax-deferred effective annual yield? A taxable account would have to earn 5.56%.
5% tax-deferred effective annual yield?
A taxable account would have to earn 6.67%
Taxable account rates based on a 25% state and federal tax bracket.
Compare the equivalent yield of today’s taxable accounts, including CDs, with tax-deferred fixed annuity. A fixed annuity can allow you to accumulate more through the power of tax deferral.
Taxes are deferred until withdrawals are taken, and tax deferral is available only to individuals or to entities that benefit individuals, such as certain trusts. Under current law, tax deferral is a basic feature of tax-qualified plans. Placing qualified funds into an annuity does not provide any additional tax benefit.  
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21. Disclosure
This presentation is not intended as an invitation to purchase any particular insurance product or fixed annuity, nor is it intended as an endorsement of any particular product or company. It is merely intended to provide you with general information about fixed annuities, to assist you in making an informed choice about financial service products currently available to you and to help you determine what products may be best suited for you. Fixed annuities may be useful retirement tools for some people. However, fixed annuities may not be suitable for all. Please consult a licensed insurance agent regarding your age, health, financial objectives, short- and long-term financial goals, liquidity needs, risk tolerance, and overall financial situation to determine if one is right for you. You should thoroughly review all brochures, specimen contracts, buyer’s guides, and disclosure forms before purchasing any fixed annuity or any other financial services product.
This presentation is not intended as an invitation to purchase any particular insurance product or fixed annuity, nor is it intended as an endorsement of any particular product or company. It is merely intended to provide you with general information about fixed annuities, to assist you in making an informed choice about financial service products currently available to you and what products may be best suited for you.
Fixed annuities may be useful retirement tools for some people. However, fixed annuities may not be suitable for all. Please consult a licensed insurance agent regarding your age, health, financial objectives, short- and long-term financial goals, liquidity needs, risk tolerance, and overall financial situation to determine if one is right for you. You should thoroughly review all brochures, specimen contracts, buyer’s guides, and disclosure forms before purchasing any fixed annuity or any other financial services product.
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22. Disclosure cont’d
Fixed annuity earnings are tax-deferred until withdrawn. Use of annuities with qualified-type plans [401(k), IRA, 403(v)] may not provide any additional tax benefits above those you already receive in such a plan. Withdrawals may be subject to income tax and a 10% federal income tax penalty if taken before age 59½. Surrender charges may apply if you withdraw more than the penalty-free amount in a year. Fixed annuities generally guarantee a minimum interest rate on all or a percentage of each contribution over the life of the contract, less any withdrawals and/or deductions and early surrender charges. Guarantees are based on the claims-paying ability of the insurer.
Insurance agents do not give legal, investment, or tax advice. Please consult your attorney, accountant, or other qualified professional regarding annuity taxation as it applies to you.
Fixed annuity earnings are tax-deferred until withdrawn. Use of annuities with qualified-type plans [401(k), IRA, 403(v)] may not provide any additional tax benefits above those you already receive in such a plan. Withdrawals may be subject to income tax and a 10% federal income tax penalty if taken before age 59½. Surrender charges may apply if you withdraw more than the penalty-free amount in a year. Fixed annuities generally guarantee a minimum interest rate on all or a percentage of each contribution over the life of the contract, less any withdrawals and/or deductions and early surrender charges. Guarantees are based on the claims-paying ability of the insurer.
Insurance agents do not give legal, investment, or tax advice. Please consult your attorney, accountant, or other qualified professional regarding annuity taxation as it applies to you.
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23. Thank You! Contact us to know more :-
Blue Horizon Insurance & Financial Services in Washington
12 S, Wenatchee
AVE Washington WA
Our website :
Request Free Quote :
Call us :
Thank you!
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