Posts Tagged ‘life insurance’

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.

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.

Conclusion

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.