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  Is An Annuity Right for You?  

The world of annuities has changed significantly over that last decade. Today, it is one where choice, flexibility and options for the investor are the governing principles. And, while there are always new contracts with all kinds of exciting benefits to meet investor needs, there are still some basic features common to all that you can consider when you begin your search for the right annuity for you. Ask yourself these questions:

1. Do You Want an Income Now or Wait to Decide Later? At their most basic level, annuities come in just two flavors: Immediate or Deferred. This refers to when you want to begin taking money out of the contract to supplement your income. With an immediate annuity, you give the insurance company a lump sum of money, and then begin taking an income immediately. The amount of money you receive, when you receive it, and how long it will last depends on the details of the contract and your situation. With most immediate annuities, you do not make additional contributions. The most familiar immediate annuity to many people is a state Lottery. The state buys an immediate annuity for the lottery winner, who then receives annual income payments from the annuity for a set number of years, commonly 20. The other more common cousin to the immediate contract is the deferred annuity. With this product, you contribute money, either in a single lump sum, or in periodic payments. You then allow that money the potential to grow for some period of time, and take the money out when you choose. Because annuities are not suitable for short-term investing, that time period is usually a number of years in the future. With a deferred annuity (non-qualified only), there is nothing that says you ever have to take money out of the contract until it "matures." Many annuities don’t mature until age 85 or later. It is important to keep in mind, too, that since annuities are generally issued by insurance companies and offer death benefit guarantees, they also charge additional fees and expenses not usually found in other investments.

2. Do you have a short or long-term time frame? Assuming that you aren’t going to take an immediate income, how long are you going to leave this money in the annuity before you begin taking withdrawals? If you’re going to use these funds before age 59 1/2, then an annuity is usually not your best choice, since the IRS will attach a 10% excise penalty to all withdrawals of earnings if you’re under that magic age (there are exceptions to withdrawal charges under specific circumstances such as death). In addition, if you need the funds in the early years of the contract, you may be subject to an early withdrawal penalty imposed by the insurance company. These are two key reasons to be sure that your time frame for your money is long term.

3. Do you want a fixed rate of return, or would you like to control your investments? There are annuity contracts that offer a guaranteed, fixed rate of return. The guarantee is based upon the claims-paying ability of the issuing company. This rate may be adjusted periodically, such as annually, or you may purchase a contract that sets a guarantee period for a certain rate of return, such as 5 years. These "fixed" annuities generally offer a lower return opportunity than their variable counterparts, however, they also carry a much lower level of risk for the contract owner. A variation on the fixed annuity is the "index" annuity. These contracts tie their rate of return to some standardized "index" such as the S&P 500 Index, yet they also guarantee at least a minimum interest rate, so that it is not possible to lose money due to fluctuating market conditions. You can also invest in "variable" annuities, that let you participate in the market through a family of "sub-accounts," commonly referred to as "variable investment options." With these contracts, you determine which variable investment options are most suitable for you, based upon your goals and objectives, risk tolerance and time frame. You then choose how much to put into each, and you may monitor your "portfolio" and exchange funds between the investment options as you feel necessary. Because variable annuities participate in the markets, they are not guaranteed and are subject to investment risk, and your contract value will fluctuate with the performance of the underlying investments. It is possible to lose money in a variable annuity.

The good news is that many variable annuities also offer a fixed account option if you’d like the comfort of allocating some of your premium payments conservatively, while taking advantage of market potential. In addition, most variable annuities offer death benefit protection for your beneficiaries in the event you die. Your beneficiary will typically receive the greater of your total premium payments or the current contract value. Many investors like the peace of mind this unique feature affords. This kind of option may have additional costs.

4. How would you like to receive your money? The best news about this question is that you don’t have to worry about it until just before you’re ready to begin taking the funds from the contract. When you purchase the annuity, the most important thing to know is that your contract offers a wide range of income/withdrawal options for you to choose from. With an annuity, there are three common ways to take your funds:

Random withdrawals that you request: This is the equivalent of taking money out of any other savings or investment account. You request a withdrawal, and the insurance company sends you the money.

A systematic income without annuitizing: Many contracts allow you to set up a regular income stream without "annuitizing" the contract. With this arrangement, there are no guarantees related to the income your contract can provide. Your funds’ ability to "last" will depend on the rate at which you take money out of the contract and the return or interest rate your contract is credited.*

A guaranteed income through annuitization: This is a contractual arrangement that you make with the insurance company to provide an income stream for some predetermined amount of time. This could be a set number of years, or it could be for as long as you live, regardless of how long you live. There is comfort in knowing you can arrange an agreement guaranteeing that you cannot outlive your income, however, once an annuitization option is chosen, and the first check is received, that choice cannot be changed. It is this lack of flexibility that drives many investors to withdraw money without annuitizing (item 2).

Annuities come in many shapes and sizes. By answering these few questions, you will get you pointed in the right direction if you’re interested in exploring annuities in more detail. In addition, a financial professional can be invaluable in your pursuit of the right option for your investment dollar.

*Keep in mind that these withdrawals may be subject to surrender charges imposed by the issuing company, may be subject to income taxes, and will reduce your death benefit amount.




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