Annuities
Annuities are financial products that provide a series of payments over a specified period. They are commonly used for retirement planning, offering a steady income stream. Annuities can be structured in various ways, such as fixed, variable, or indexed, and can be purchased through insurance companies or financial institutions.
7 Key excerpts on "Annuities"
- Thomas Herold(Author)
- 2020(Publication Date)
- THOMAS HEROLD(Publisher)
...What is Annuity? An annuity is an investment contract that an insurance company sells to individuals. This agreement promises that it will make a regular series and dollar amount of payments to the buyer. This can be either for the rest of his or her life or for a set amount of time. The payments out are typically made after the individual retires. Annuities have a long past that began in the Roman Empire. Roman citizens could purchase annual contracts from the Roman Emperor. The empire would then make annual payments to the citizens for the remainder of their lives. European governments revived the sale of Annuities in the 1600s. They sold lump sum contracts to investors to help pay for expensive wars. These investors also received a number of prearranged payments back from the governments that sold them. Annuities in America started as a way to support church ministries. 1912 saw the first annuity contract that was offered to the general American public by a Pennsylvania life insurance firm. These contracts continued to evolve and grow throughout the 1950s until they became commonplace in the 1980s. Annuities offer certain tax advantages to their owners. Annuity holders only pay taxes on their contributions when they begin to take withdrawals or distributions from the funds. Every annuity contract is tax deferred. This signifies that investment earnings in such annuity accounts continue to grow tax deferred until the owners withdraw them. This also means that annuity earnings may not be taken out without paying a penalty until the owner reaches the set age of 59 1/2. There are two general types of Annuities contracts. Fixed Annuities pledge to provide a guaranteed payment amount. Variable Annuities do not make this guarantee. They do offer the possibility of earning higher returns in the variable annuity. Experts consider either type of annuity to be a safe but low yielding investment vehicle. Annuities have a specific purpose...
eBook - ePub- James Grant CPA MS(Author)
- 2022(Publication Date)
- Page Publishing, Inc.(Publisher)
...Annuities are very complicated. The public lacks a clear understanding of how Annuities work. Investors who have invested in variable Annuities could do a lot better putting their money elsewhere. I have seen many articles on Annuities and variable Annuities in particular. None of them have been favorable unless they appeared in an insurance periodical. We will see some of these articles later. In addition to the fact that variable Annuities do not compete from a tax standpoint to buy-and-hold investing, they are also a high-cost answer to investing. Investors should fully fund their retirement accounts or assembling a portfolio of reliable, dividend-paying stocks before every considering an annuity. Annuities are frequently unnecessary and redundant. Annuities are also dangerous to sellers, such as insurance agents, certified financial planners (CFPs), and registered representatives. This is because they are structurally flawed and the publicity associated with them is almost always negative. Sellers of Annuities are assuming a lot of risk because the promised tax benefits of Annuities are illusory and their costs are frequently exorbitant. The complicated nature of this product guarantees trouble. Annuities Defined An annuity is an insurance contract between an insurance company and the annuitant, who may or may not be the owner of the policy. The insurance company promises to direct the investments entrusted to it, as directed by the annuitant, and to pay certain sums to the annuitant’s beneficiary (ies) in the event of the annuitant’s death. In the case of variable Annuities, the investments are in equity-oriented mutual funds. Fixed Annuities invest in fixed-income, debt obligations...
eBook - ePubThe Ultimate Financial Plan
Balancing Your Money and Life
- Jim Stovall, Tim Maurer(Authors)
- 2011(Publication Date)
- Wiley(Publisher)
...Doctors, lawyers, psychologists, pastors, priests, and a small subset of financial advisors are a handful of professionals who are required to act as a fiduciary at all times. Going through life as a skeptic, distrusting everyone, is no way to live; but you should know that in virtually every product sold or service rendered, YOU are your own best fiduciary. Having a better understanding of the economic bias of the seller will make you a better, more informed consumer. Jim Stovall Before we go off the deep end and give you the impression there is never a valuable use for an annuity, let me assure you there is. We’ll be getting to that soon, but know the criteria for appropriate annuity sales are quite narrow. Most of the time an annuity is sold, there’s probably a better option. To understand their use, we must give you a fuller explanation of the types of Annuities in existence and how they function. The best definition for the word annuity is an investment product sold by an insurance company. While many equate the term annuity with a different definition—a perpetual income stream—this definition is too tapered for the broader class of investment products known as Annuities. The four broad types of Annuities are immediate Annuities, fixed Annuities, variable Annuities, and equity indexed Annuities. Immediate Annuities The first type of annuity, the immediate annuity, meets the shortsighted definition for Annuities mentioned previously. Immediate Annuities are those in which a consumer gives an insurance company a set number of dollars in return for a stream of income to the annuity owner, the person making the monetary investment. The annuitant is the person on whose life the stream of income is based...
eBook - ePubThe Insured Portfolio
Your Gateway to Stress-Free Global Investments
- Erika Nolan, Marc-Andre Sola, Shannon Crouch(Authors)
- 2010(Publication Date)
- Wiley(Publisher)
...While the term annuity encompasses many types of income arrangements, most often it’s used to describe an arrangement where an insurance company agrees to make a series of payments to someone for the rest of their life in exchange for a single, fixed premium. For example, you give an insurance company $500,000 at age 65. In turn, they agree to pay you an income of $3,500 per month for the rest of your life. When you die, the payments stop. That’s a typical annuity. Another common example is for an annuity to be purchased, but rather than funding it with one, single premium payment, there are a series of periodic payments until such time as the buyer of the annuity is ready to retire. For example, if you’re 50 years old and make monthly payments of $3,000 a month for 15 years, the same insurance company might be willing to give you a lifetime income of $8,000 a month when you retire at age 65. Annuities have a rich history stretching across countries and centuries. But since we’re talking about your financial future as a saver and investor in twenty-first-century America, we’ll start right at home. What you will discover is that American Annuities are not the right solution for the needs and challenges we are facing. However, it’s important to understand why. You see, the developments that have occurred with the U.S. annuity have become the model favored by financial centers elsewhere in the world. THE EVOLUTION OF Annuities IN THE UNITED STATES Annuities have been in North America since before the current U.S. federal government even set up shop. In 1759, a company in Pennsylvania was formed to benefit Presbyterian ministers and their families. Ministers would contribute to the fund, in exchange for lifetime income payments. It wasn’t until over a century later, in 1912, that Americans could buy Annuities outside of a group...
- Stephan Leimberg, Keith A. Buck(Authors)
- 2019(Publication Date)
- The National Underwriter Company(Publisher)
...Annuities CHAPTER 8 INTRODUCTION Annuities are the only investment vehicles that can guarantee investors that they will not outlive their income, and they do this in a tax-favored manner. In addition, Annuities are available with a host of features to meet a wide variety of investor needs. Below is a brief description of the various types of Annuities that are available. See “Types of Annuities” below for more details. Accumulation and Payout Phases Technically, Annuities are contracts providing for the systematic liquidation of principal and interest in the form of a series of payments over time. 1 However, this really refers to the payout phase of an annuity; in point of fact, Annuities can (and often do) have an accumulation phase that also lasts for a substantial period of time. An annuity is established when an investor makes a cash payment to an insurance company, which invests the money. This may be a single large cash payment or a series of periodic payments over time. During the accumulation phase the money remains invested with the insurance company and is periodically credited with some growth factor. In return for making the deposit(s) into the annuity, the insurance company ultimately agrees to pay the owner(s) a specified amount of payments periodically, beginning on a specified date. This is the payout phase of the annuity. Immediate vs. Deferred Payouts If the specified date for payouts to begin is within one year of the date the contract is established (i.e., a single cash payment is made and the insurance company begins a systematic liquidation of the payment back to the owner within one year), the annuity is called an immediate annuity. If, alternatively, the specified date for payouts to begin is later than one year, the annuity is called a deferred annuity because deposits are made now, but the payout is deferred. An immediate annuity only has a payout phase; a deferred annuity has both an accumulation and a payout phase. Life vs...
eBook - ePub- Hank Parrot(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...There are many different kinds of Annuities, providing a variety of guarantees, periods, rates of return, and investment options. The Three Categories of Annuities When it comes to determining which annuity is best for you know that there are three main categories of Annuities. Variable Annuities are similar to mutual funds. When you invest in a variable annuity, your money is placed in sub-accounts (selected by you and your adviser), which are like mutual funds and thus subject to the rise and fall of the market and, even more so, the underlying performance of the sub-accounts selected. If you are past the accumulation and risk-taking stage of your investment life, a variable annuity is not likely to be a suitable or desirable choice. Furthermore, the various costs associated with variable Annuities can also reduce your actual return. If you’re willing to assume the risk of investing in the market, it probably makes more sense just to go with a mutual fund! I talk in more detail about the importance of investment costs in Chapter 5, as well as optimum portfolio design—which is nearly impossible to attain through variable annuity sub-accounts. Traditional (Fixed) Annuities provide a guarantee of principal, a guaranteed rate of return for a specified period, and the option for a guaranteed payment stream if you elect it. A fixed annuity typically has a guaranteed minimum interest rate so that your money will never earn less than this rate. Some fixed Annuities have fluid interest rates—that is, the interest rate on your annuity can rise or fall annually on the anniversary of your policy, but can never go below the guaranteed minimum. Other fixed Annuities feature multiyear guarantees, wherein you can lock in a guaranteed interest rate for period of time (i.e. 3-, 5-, 7- and 10-year maturities). Fixed Annuities have good liquidity, as most allow you to withdraw up to 10 percent annually without penalty...
- Larry E. Swedroe, Kevin Grogan(Authors)
- 2021(Publication Date)
- Harriman House(Publisher)
...Chapter 14: Longevity Risk: The Role of Annuities W e buy insurance to protect our homes, cars, and lives, transferring risks we prefer not to bear ourselves. Thus, buying insurance is really about diversifying risks we find unacceptable to bear, because the costs of not being insured and having the risks “show up” are too great. The same logic applies to the purchase of payout Annuities, the payments of which can be fixed or inflation-adjusted (at least to some degr ee) dollars. Each of us faces two risks related to life expectancy. The first is the risk of premature death, resulting in the loss of our human capital (defined as the present value of a person’s future earnings). The second risk, longevity risk, is the risk of living to an advanced age and outliving our assets. While most of us are familiar and comfortable with protecting against the first risk by purchasing life insurance, many are not aware that insurance companies also sell products that can protect against longevity risk. At its most basic level, deciding to purchase a payout annuity is a decision to insure against longevity risk—the economic consequences of outliving a portfolio of financial assets tasked with providing lifetime income. As the pain of outliving one’s financial assets is extremely high, for individuals running significant risk of that occurring, purchasing a payout annuity makes sense. Increasing Life Expectancy Longevity risk is coming into focus because people are living longer—with the research showing this is especially true for wealthier individuals. The table overleaf reports the probability of at least one of a 65-year-old couple livin g to age 95. Male Female Both One Average American 7% 13% 1% 19% Healthy American 20% 29% 6% 43% Healthy American in 2028 25% 33% 8% 50% An average 65-year-old couple has a 19 percent chance that one of them will live to age 95 or beyond. A healthy 65-year-old couple has a 43 percent chance that one of them will live to at least age 95...
