Dealing with Annuity Brokers

An annuity is a life insurance product that promises payments to a beneficiary throughout his or her lifetime (or a set number of years, known as “period certain”) in exchange for prior payments to the life insurance company. An annuity has two stages during its lifetime: an accumulation phase in which funds are deposited into the product either at regular intervals or as a single lump sum, and a distribution phase when the insurance company pays regularly to the beneficiary. The primary difference between an annuity and a traditional life insurance contract is that an annuity is designed to be payable to the policyholder during his or her lifetime.

These products are also regulated in various degrees by the IRS depending on the product’s structure. While annuities are commonly used as retirement funds similar to pensions, they can be useful for just about any purpose in which a guaranteed income is desirable at a later date.

Who Can Sell an Annuity?

By law in the United States, only life insurance companies can sell annuity products. Therefore, only a properly licensed insurance professional with an appointment from a life insurance company can sell an annuity. In the United States, the terms “annuity broker” and “annuity advisor” are somewhat synonymous. In general, annuity brokers are the professionals of record licensed to sell annuity products by a state insurance commission. In addition, annuity brokers who sell variable products must also hold the relevant FINRA securities licenses (usually Series 6 and 63 depending on the state). “Annuity advisor” may refer to someone qualified to service the annuity product after the sale, but not necessarily the agent of record who sold the product.

What Kinds of Annuities Are Out There?

Fundamentally there are three varieties of annuities contracts. Fixed annuities, or annuities with a contractual, predetermined return on investment, and variable annuities, or annuities in which the return of investment is determined by market conditions. Fixed annuities are somewhat analogous to savings accounts, with a low but stated interest rate. Variable annuities are akin to mutual funds, utilizing funds based on stocks, bonds and other financial vehicles called “separate accounts” which are in practice very similar to mutual fund subaccounts. While variable annuities traditionally outperform fixed annuities over the long term, they are subject to risk. It is possible to lose money on a variable annuity, something any potential investor should be keenly aware of.

Conceived in the mid 1990s, the third type of annuity contract is a fixed indexed annuity (FIA), or simply an indexed annuity, which is a hybrid of the fixed and variable annuity. Like the fixed annuity, rate of return is based on a stated formula and it does not use special accounts. Like the variable annuity, the rate of return is based on market performance. Rate of return on a fixed annuity is based on the performance of a stock index (commonly the S&P 500, although others can be used). Many indexed annuity products employ caps and floors on their products, which means that the annuity can never make more than a certain amount (say 9 percent) or less than a certain amount (say 2.5 percent) in any given year regardless of the stock index’s performance. The indexed annuity is often a good fit for an individual who wants better performance than a fixed annuity can provide but is hesitant to assume the risk required with a variable annuity.

What Annuity Brokers Will Ask You

First and foremost, annuity brokers will ask what the annuity is intended to be used for. While retirement funding may be the most common answer, it isn’t the only one. Annuity brokers will also ask you questions on your retirement timeline, your investment tolerance (i.e. how much experience and comfort you have in various investment vehicles), and of course how much you expect to invest over time. If looking at a variable product with an annuity broker, these questions are required by government and industry regulation.

Annuity brokers may also ask you how you would like to pay into your annuity. Some annuity products can be started up with as little as $25. Others, such as a single premium option, require substantial amounts. Single premium is what it implies; pay a large lump sum into the annuity once then let it accumulate until it’s time to annuitize, or switch from the accumulation phase to the distribution phase.

What To Ask Your Annuity Broker

Ask your annuity broker about the surrender charge schedule on any annuity product. A surrender charge is the percentage of a annuity’s value the life insurance company will hold if the product is liquidated in the first years after its creation. This is in addition to any government withholding that may apply. For example, the company may charge a surrender charge of 10 percent in the first year, 9 percent in the second year, and so on. Surrender charges are typically in force for five to seven years; however surrender charge schedules lasting longer than 15 years are not unheard of.

One should also consider what whether to invest in a qualified annuity – usually in the form of a regular or Roth IRA – or in a non-qualified annuity. With qualified annuities, yearly contributions and disbursements are limited (currently $5,000 per year across all IRAs you own, but increasing to $6,000 in 2011 if one is age 50 or over, with disbursements without penalty allowed only after age 59 ½), but one enjoys tax free or tax deferred status. Usually non-qualified annuities have fewer restrictions regarding contributions and disbursements, but are not as favorable from a tax standpoint. A qualified annuity is designed to serve as a retirement fund and should be used accordingly. Non-qualified annuities may be a better fit for other situations. Both qualified and non-qualified annuities are generally available as fixed, variable or indexed products.

If looking at an indexed product, ask the annuity broker how often the cap and floor changes, when was the last time it changed, and if he expects it to change again in the near future.

Managing Your IRA After Retirement

Today people who retire at age 65 may very well be looking at a 30-year retirement. With such a long timeline, it is imperative to make the best use of IRAs before retirement, but after as well.

First and foremost, try to keep your retirement funds funded while you’re working. There are many opportunities to withdraw from your funds well before retirement age, but this should be done only as an absolute last resort.

There is no set time to undertake these steps. For example, while long term care insurance should be a consideration for most people after age 70, getting it while younger results in lower premiums. Therefore depending on individual situations taking out a policy at age 60 or even younger can be a good move.

In Your 60s

Thanks to recent changes in federal law, after age 50 one is entitled to make additional contributions to IRAs. In one’s 60s it may be time to consider consolidating your retirement plans into a single IRA as well, perhaps in the form of a qualified annuity issued by a life insurance company. It is possible to roll over these plans into a Roth IRA. If working well into the 60s is planned, this may be a good idea.

Remember, one can contribute to a Roth IRA at any age as long as one continues to receive earned income and meet the maximum income restrictions which don’t change based on age. Further, while distributions on a Roth IRA can be taken at any point after age 59 ½, they are not required until age 70 ½. If income needs can be met elsewhere, it may be a good idea to avoid tapping into the tax free distributions a Roth IRA provides until age 70 ½.

Name Your Beneficiary

It is always a good idea to name a spouse as a beneficiary for a traditional IRA sooner rather than later. The advantage is fairly straightforward: if the IRA owner dies with the spouse named as a beneficiary on the plan, the spouse can then simply claim that IRA as their own. Individuals other than spouses may also be named as the beneficiary on an IRA, but they must pay regular income taxes on the proceeds, either by cashing in the IRA within five years of the original owner’s death or over time by taking distributions.

IRA beneficiaries are revocable, which means they can be changed at any time during the life of the policy owner, or even a bit after. Current law allows an IRA beneficiary to be changed at any point before December 31 of the year after the policy owner’s death. This can allow a surviving spouse to name a child or another contingent beneficiary, and in the process significantly delay the tax impact of doing so.

What About Social Security?

Social Security benefits can be taken as early as age 62 and as late as age 70. However, the retirement age at which individuals are eligible for full Social Security benefits born during or after 1960 is 67. Taking benefits before then will subject the beneficiary to penalties. Conversely, waiting until age 70 results in higher monthly benefits. It is definitely in the interest of any future retiree to postpone taking Social Security until age 70 if possible, or at least until he or she hits the government-mandated full retirement age. People who live well into their 80s or later will find themselves particularly ahead of the game with this strategy.

In Your 70s

At age 70 ½ minimum required distributions (MRDs) on retirement income plans can no longer be deferred and must be taken, regardless of whether the policy owner is working at that time or not. Failing to do so will subject any MRDs not taken to a 50 percent penalty from the IRS. Although the policy owner technically has until April 1 of the year after she turns 70 ½ to take the first MRD, doing so may create a situation in which two MRDs are required in the same calendar year, which in turn could put the policy owner in a higher tax bracket. This should be taken into consideration when determining exactly when to take that first MRD.

This is a good time to review wills and long term care plans. If total retirement assets at this point are greater than $100,000 but less than $2 million, reallocating some of these assets to a long term care insurance (LTC) policy may be a good investment. If assets are less than $100,000, one is more likely to qualify for Medicaid; if more than $2 million, paying out of pocket may be a better idea. However as with life insurance, premiums are more inexpensive if LTC insurance is purchased at a younger age. If LTC is an option, make sure variables such as duration of benefits and elimination period – or the length of time one must be in a long-term care facility before one can receive LTC insurance benefits – are discussed with a qualified financial advisor.

In Your 80s

Hopefully by age 80 one has long established his or her retirement distribution strategy. One thing to consider at this age is that most people tend to spend less after age 80, so day-to-day income needs are likely to be less at this age.

Even after retirement, a savings plan should be followed. It is recommended that retirees in their 60s save 40 to 50 percent of their income, increasing to 50 to 60 percent in their 70s. This is actually more than is recommended for younger people. However if this is done, the recommendation is that saving up will no longer be necessary after age 80.

Dump The Commissions

Managing an IRA and other retirement sources after retirement can be a daunting challenge for even the most experienced investor. Many retirees may want to seek professional guidance in managing their affairs throughout what statistically promises to be a long retirement. What they are not likely to want, however, is an endless barrage of sales pitches for new financial products. After all, at this point one should be much more interested in making the best of what they already have. To that end, seek the guidance of a fee-only financial adviser, or one who is compensated entirely on client fees instead of company commissions. Their unbiased, sales-free guidance can be particularly useful after retirement.

Life & Annuities Explained

Life Insurance and Annuities have a few similarities but the objectives of the two products are the exact opposite. A life insurance policy is to insurance that if you die prematurely that your lost income will be replaced for your dependents and heirs. An annuity is a contract with an insurance company that guarantees that you will not out live your retirement income. In other words, one is to insure your income if you die too soon, the other is to insure your income if you live too long.

Who Should Buy Life Insurance?

Many people wonder if they even need life insurance. If you are single with no dependents, why should you worry about life insurance? Well if before you die you become very ill and need 24 hour care maybe in a hospital, you will rack up some hefty medical expenses. Will you parents or you siblings want to be strapped with these bills? Probably not.

What about funeral expenses? Who will be strapped with those? If you have credit card debt or any other kind of debt, you may want to consider covering that with life insurance. So even if you are single, you need to have some life insurance to cover the mess you will leave.

If you are married and have a family it goes without question that you need life insurance. If you die prematurely your family will still have rent or a mortgage and bills to pay. You may also leave a mess that needs to be cleaned up also, plus incur funeral expenses.

So, to answer the question of who should buy life insurance, everyone should have some life insurance benefits. It is just to help with extra expenses that a death can cause a family and in some instances it is to replace your financial contribution to the welfare of your family. If you are a stay at home mother, you need life insurance also. If you die prematurely, your family will have additional expenses for child care and other help.

Who Should Buy an Annuity?

Annuities are typically purchased by people who are beginning to think about retirement. You don’t have to be ready to retire soon in order to consider an annuity, but most annuity buyers have pretty finished raising their children and have some extra money set aside for a rainy day.

Many annuity buyers will be in their late 40’s or early 50’s. They are not ready just yet to retire but are beginning to focus on this phase of their lives a bit more. If you have done all the pre-tax saving you can do with IRAs and 401K contributions, you may want to start looking at other ways to tax-defer investment income. An annuity is a good want to add to your retirement nest egg.

You can contribute after tax dollars but any returns you make will be tax deferred until you start to take withdrawals from the annuity. You can use an annuity for 401K rollovers into IRA accounts if you want to start adding guaranteed living benefits to your retirement vehicles.

The annuities available in today’s marketplace are especially designed to give you living guarantees. Years ago people looked at annuities as a way to tax-defer investment returns and then annuitize the contract at retirement so that they had a life long income. The living benefits on some of the newer annuity contracts give fabulous benefits beyond tax deferral and annuitization. In fact, most annuities are not annuitized anymore. The contract owners can take lifetime income from them while still maintaining control of the money in them.

For more information, see Annuities Explained.

What are the Differences between Life Insurance and Annuity Contracts?

The obvious differences between a life insurance contract and an annuity contract is that one provides a death benefit as the primary benefit, and the other provides an investment vehicle that will provide a future income to the owner. Many people confuse these two vehicles. It is important to distinguish the differences though.

If you primary concern right now is to make sure you have enough retirement income that you cannot out live, then an annuity is the vehicle to use to fill this need. There is a secondary benefit of a death benefit to your dependents and heirs, but that is only a secondary benefit. You need to use the right product to meet your primary needs first.

If your primary concern is to replace your lost income to your family in the event of your premature death then you need to purchase life insurance. This is the most cost effective way to fulfill this need. If you live a long life there are long term benefits in the way of cash value accumulation that you can eventually use as a source of retirement income.

This is however, a secondary benefit of a life insurance policy. You should use life insurance only to fulfill your primary need of replacing your income to your family and if you are lucky enough not to need it for this purpose you can take advantage of the secondary benefit.


In conclusion, when trying to decide whether you are better off buying a life insurance policy that builds great cash value or buying an annuity that has a death benefit, you should stop to consider your primary objective. As mentioned earlier, every person needs some life insurance just to clean up their debts and expenses from a premature death. Some people need life insurance to replace their current income for dependents. After you have these things and probably quite a few other things covered, then you can start thinking about annuities for retirement income.

Both of these contracts are good ideas for most people at some point during there life, just determine what you most immediate needs are and use the correct product for that need. Life insurance insures the replacement of your income to your to those who survive you and an annuity insures your income if you live too long.

What is an Equity Indexed Annuity?

If you are considering the purchase of an annuity, you may be thinking that you either do a variable annuity or a fixed annuity. A variable annuity allows you to benefit from investing in the stock market which can have its ups and downs. No pun intended. You may want the chance to make gains when the stock market goes up but you may also have a high degree of fear that you will lose money when it drops.

You may think that the only other alternative to the stock market and a variable annuity is a fixed rate annuity that will not fluctuate but which currently pays very low fixed interest rate returns. What if you could have a bit of both of these types of annuities? That is what an Equity Indexed Annuity offers.

You can have the assurance that you will not lose money if the market goes down but you have the chance to benefit to a limited degree if it goes up. There is a price to pay for this benefit. Not only are there fees included inside your contract for this benefit but you will give up some of the yield you would get on a traditional fixed annuity. If you can get a fixed rate 7 year annuity paying you a guaranteed 2.5%, you may only get 1.75% guaranteed on an equity indexed annuity. Why? Because you are giving up a bit or your guarantee for more potential upside gain.

How does an Equity Indexed Annuity Work?

When you purchase your equity indexed annuity you will be given a rate of participation percentage. You may be able to participate in the upside of the market with a 70% participation ratio. That means that if the Index that your annuity is tracking, which is typically the S & P 500, goes up 10% for the year, you will receive an interest credit of 7% for that year. Most contracts have a limit to the interest rate you can be credited.

An example of an equity indexed annuity may be one where you invest $200,000 initially. You are guaranteed to get no less than a 1.5% annual interest credit. However, you can participate at an 80% ratio up to a maximum of 8% per year. Suppose in your first year the S & P index moved up 12%. That means that you would receive an 8% interest rate that year. Why not 9.6%? Because you are capped at 8%.

Suppose that the next year the market goes up only 7%. You would get an interest credit of 5.6% for the year. (80% of the 7%) However, say in the third year the market goes down 30%. Your principal would not go down but you would only get credited a 1.5% interest rate. This is a simple example but you get the idea. This type of annuity gives up potential for greater gain but not so much of a guaranteed rate of return.

Who Should Consider an Equity Indexed Annuity?

The type of person who should consider an Equity Indexed Annuity is someone who has a few years until they retire. This gives them some time to try and get a larger return with stock market gains. In the current economic environment though where fixed rates of return are so incredibly low, it may be the best way to go for people in close to retirement.

Current fixed rate annuities may pay 3% if you are willing to lock in that rate for 10 years. At this rate the cost of trying to get a higher return by investing in an Equity Indexed annuity is minimal. If you can handle potentially getting 1.5% lower return each year, you may find that over time you do much better with an indexed annuity than with a fixed rate annuity.

If interest rates were higher currently on fixed annuities it may be a bit more tempting to just lock in a fixed rate and forget it. However, at a cost of 1% or 2%, what’s the big deal? Right? As recent as 3 years ago, a person could lock in a rate of 4.5% on fixed annuities for 5 years, but those days are gone now.

Important Issues to Consider When Shopping for an Equity Indexed Annuity

Unlike variable annuities, equity indexed annuities do not invest in mutual funds. They invest in fixed income instruments. Their security is directly tied to the credit strength of the insurance company that is offering them. If the insurance company goes into bankruptcy, your annuity will be paid back according to bankruptcy court rulings. That means you can lose your money if the insurance company goes under.

It is a rare event to see an insurance company go bankrupt, but it has happened. With the current world economic instability, it is very important that you select an insurance company with a rock solid financial standing. John Hancock is one of the top ranked insurance companies in the industry. New York Life in another top ranked company. Pacific Life, American National and Prudential are a few other names that are in pretty good financial standing.

You should do some research and make sure that the company you are dealing with has one of the top financial ratings available. Moody’s and Standard and Poor’s as well as Best’s all put out credit ratings for insurance companies. Don’t invest until you do your homework.


As mentioned earlier, in the current low interest rate environment we are in, it may be worth looking at an Equity Indexed annuity for your retirement. We can’t say for sure what will happen with the stock market over time, but the cost of trying for higher returns is very low right now.

You should compare the internal costs of the annuities offered by the top ranked insurance companies on these types of contracts. Also compare the minimum rates of return and then make your selection.

What is an Immediate Annuity?

Annuities can be very confusing. Many people think of an annuity as a long term investment that you can add money to each month until you retire so you can have a retirement income. This is one way an annuity is built. Another kind of annuity is an immediate annuity. This is an annuity that you purchase with a lump sum of money right at the time you need to start drawing an income.

This was why annuities were originally developed in the first place. People who had saved money all during their working years would put the money into an immediate annuity that would start paying them a monthly income right away. This was a primary way that people could guarantee that they did not out live their retirement savings.

Who Would Purchase an Immediate Annuity?

The purchaser of an immediate annuity would be someone who needs to use the money right away as a source of steady income. This would more times than not be a person who is 65 years old and is retiring from the work place. They may have a company pension and social security benefits starting, but they want to supplement these two income sources with another source of guaranteed income for life.

Many people have become concerned about their pension money because of the economic downturn in recent years. If the company they worked for and get their pension from goes bankrupt they may not be able to rely on their pension for income. A lot of people are also concerned about the future of Social Security benefits. An immediate annuity can help to diversify the risk with their retirement income.

Another type of person who would purchase an immediate annuity may be a guardian for a disabled person. They may be caring for a disabled child or other family member and they want to make sure that they have a stream of income that their disabled family member cannot outlive. This is one way of making sure that the person is cared for even after other family members have died.

What Should You Consider When Purchasing an Immediate Annuity?

One important thing you should consider when purchasing an Immediate Annuity is the credit rating of the insurance company you are purchasing it from. An immediate annuity will more than likely be invested at a fixed rate for a certain period of time. It is critical when purchasing fixed rate annuities that the insurance company not have financial trouble. It is rare for an insurance company to go bankrupt but if they do, fixed annuities can be in jeopardy. The interest and principal are tied to the ability of the insurance company to make payments.

Another thing to consider is obviously the rate of interest you will receive and the other contract options that are available on the annuity. Make sure that you understand the death benefits and chose your contract options appropriately. This would involve deciding if you want the income stream based only on your life or on your life and your spouse’s life.

If you have it based only on your life, you should consider having a 10 year certain or 20 certain. This means that if you die before receiving the majority of the benefits you pay into the contract, your beneficiary will receive at least 10 years minus what you received. If you have a 20 year certain they will receive 20 years of income minus the years you received.

In the event you select to have the income stream based on both you and your spouse’s life, the income payments will be a little bit lower each month, but they will cover two lives instead of one. These are just a couple of examples of how you may choose to have your immediate annuity pay benefits. You should read all the options available to you before you decide which one to select. It will difficult to change later.

How to Fund an Immediate Annuity

You can fund an immediate annuity with money that you have saved over the years in a savings account or in CDs. You may fund it with money that you were putting into a deferred annuity for a number of years.

Many people roll over qualified retirement money into immediate annuities. This would be 401K money or IRA accounts. Qualified money means that taxes have not yet been paid on this money. However, many people opt to use annuities for their retirement money because they feel that the money will be safer and steadier.

They want to have a set income that they can count on rather than dealing with the ups and downs of the investment accounts inside their 401K accounts. An immediate annuity will be set and although the interest rates may change the income stream is much easier to predict.

What Companies Offer Immediate Annuities?

Almost any insurance company that offers annuities will offer immediate annuities. They all have customers that are retiring every day so it would be unusual if a company did not have this product. Just a few names of insurance companies with immediate annuities are MetLife, ING, MassMutual, Prudential and John Hancock. These are just a few. As stated most insurance companies that offer annuities will have an immediate annuity product.

Just make sure that the insurance company has a strong financial ranking. As mentioned before, the insurance company will be the one that determines the security of your future income stream, so just make sure that they are solid. You will want to do some comparison shopping to see who has the best rates for the longest period of time. Also check the income options that each company offers to make sure that you have the best option for your particular situation. If you have a solid company that will pay you a good interest rate, you should not have to worry about this portion of your retirement income.