What is an Annuity?
A fixed annuity is a financial contract between you and an insurance company with guaranteed interest and guaranteed annuity income options. There are no up-front fees or administrative fees during the life of your contract.
Benefits of an Annuity
Annuities are an excellent tool to help you plan for your financial security. They offer a variety of benefits including tax-deferred growth, ability to avoid probate, lifetime income options and stability.
- Tax-Deferred Growth: One of the many advantages of deferred annuities is the opportunity to accumulate a substantial sum of money by allowing your premium and interest to grow tax-deferred. Interest earned on your annuity is not currently taxable by the state or federal government until you choose to withdraw money from your annuity. This is the key difference between an annuity and other taxable financial vehicles. A 5% return may sound good initially, but if you are in a taxable vehicle with a combined 27% tax bracket, the actual return is 3.65%. Combine this with an average inflation rate of 4%, and what have you truly gained? That’s right …nothing!
- With that in mind, consider the many advantages of an annuity, including triple compounding! With annuities you earn interest on your principal, interest on your interest, and interest on what you would normally pay in taxes. You will not pay income taxes on annuity interest until you withdraw it from your annuity. You’re in control when you pay income taxes!
- May Avoid Probate: Annuities offer the ability to name a specific beneficiary, which may minimize the expense, delays, and publicity that comes with probate and maintain privacy. Your named beneficiary may receive death proceeds as either a lump sum or monthly income.
- Income options: You not only have the flexibility to choose when you begin withdrawals, but the flexibility to choose how:
- As a lump sum distribution, less withdrawal charges;
- As an income for a specific number of years;
- As an income for as long as you or your spouse live, your annuity can provide you with a guaranteed income stream. You have the ability to choose from several different income options, including life or a specific period. With non-qualified plans, a portion of each income payment represents a return of premium that is not taxable, reducing your tax liabilities.
- Stability: Your tax deferred annuity is a stable investment. State insurance department laws require that insurance companies establish and maintain reserves equal to the cash surrender value of you annuity contract at all times. In addition, state laws require we maintain minimum amounts of capital and surplus for further contract owner protection.
Insurance companies invest your premium dollars in a diversity of investments that are closely regulated by the state insurance departments. Those long term investments ensure the stability of the company and help provide you with a competitive yield.
What types of annuities are there?
- Traditional Fixed Annuity: Offers a declared fixed interest rate that is guaranteed for a specific period and guaranteed to never go below a specific percentage.
- Equity-Indexed Annuities (EIAs): EIAs have interest rates that are linked in part to growth in the equity market as measured by an index such as the S&P 500®. The EIA owner enjoys the upside potential of equities, but is not exposed to downside risk. Subject to fixed minimum guarantees, the value of an EIA can only increase due to index growth it will never decline due to index movement.
- Immediate Annuity: You are guaranteed an income stream ranging from a specific period of time to your entire life. An immediate annuity offers a solution to the problem of outliving your money.
- Variable Annuity: Offers you the potential for high returns. When you purchase a Variable Annuity with Midland National you have the ability to choose from a variety of well-known funds using a variety of investment strategies.
*Variable annuities are suitable for long-term investing, such as retirement investing, and are subject to market risk.
For this reason, First Financial Insurance Group does not offer Variable Annuities. Being in the senior market, our clients do not want the risk. A variable annuity does offer more upside potential in an up market. But, this comes at the cost of risk of principal in a down market. This information on variable annuities is for educational purposes only.
Is an annuity the right investment for me?
- You’re nearing retirement age or have already retired.
- You need to replace income from your regular paycheck.
- You want the peace of mind that your investment won’t decline in value.
- You want an alternative to a certificate of deposit.
- You want to build money tax deferred to use at a later date.
- You have non-qualified funds to invest in a financial product.