Why Fixed Index Annuities are better than 401k for healthy seniors

Safe (acts like a life insurance), Accessible, Avoid Probate, Rate of return has no downside potential, Taxed less, Fees are less, and an income for life with disability benefits.
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About Annuities

Annuities are insurance contracts that guarantee a fixed or variable payment to the annuitant (the investor) at some future time, usually retirement. Annuities come in different varieties with many different options (called riders) so each annuity works in its own particular way, but there are some general concepts to understand.

Two Phases of Annuities

Generally, Annuities have two phases: an “accumulation” phase and a “distribution” phase.

The Accumulation phase is when the investor’s contributions (called premiums) are made. The contributions can be made in a lump sum or in installments over a period of time.

The Distribution phase is when the investor can withdraw their money. The distribution can also be done in either a lump sum or in payments over a period of time.

Deferred vs. Immediate

When entering an Annuity, you may set the Distribution phase to begin immediately or have the payments delayed to some point in the future. As such, Annuities can be Deferred Annuities or Immediate Annuities. Whether Deferred or Immediate, earnings in the Accumulation and Distribution phases grow on a tax-deferred basis.

Fixed Annuities

In a Fixed Annuity, the insurance company guarantees a fixed payment to the annuitant (investor) for either the lifetime of the investor or for a specified period of time. If an investor dies before their principal has been fully paid out, they may receive only a portion of the monies invested during the Accumulation phase. Essentially, the insurance company insures two risks in offering the Fixed Annuity: the investment risk and the risk of an investor living beyond the principal and interest earned.

To finance a fixed payment over time, a Fixed Annuity must generate interest on the premiums paid. A Fixed Annuity contract typically specifies two levels of interest: a Current Rate and a Minimum Rate. The Current Rate reflects the current interest rates the Fixed Annuity will earn and is guaranteed at the beginning of each calendar year. The Minimum Rate is the minimum interest rate the insurance company will guarantee if the Current Rate falls. Minimum Rates are determined by states. Utah currently requires a minimum of 3 percent.

As the principal and interest is guaranteed by the insurance company, the risk of a fixed annuity is entirely based on the financial health of the company selling the Fixed Annuity.

Variable Annuities

Variable Annuities differ in that their rate of return is based on an underlying securities portfolio or other index of performance (called a subaccount). That means that the value of the Variable Annuity contract itself may rise or fall with the stock market. Not only does this affect earnings in the Accumulation phase and payments during the Distribution phase, but also presents the risk that the Variable Annuity loses money.

Variable Annuities are often sold by comparing them to a mutual fund, but focusing on the features that Variable Annuities offer and mutual funds do not. These selling points include:

  1. Tax-Deferred Earnings — While market gains in the subaccount are not taxed until the Distribution phase, other types of investment accounts offer the same tax advantage. A Traditional or Rollover IRA also holds securities (e.g. mutual funds, stocks, bonds) and defers taxes until distributions are made.
  2. Death Benefit — Similar to insurance products, most Variable Annuities include a death benefit, which allows a designated beneficiary to receive a certain amount upon the annuitant’s death. That amount is often the greater of either: all the money in the account, or some guaranteed minimum (e.g. all premiums paid minus withdrawals taken). Sometimes riders are available to elect a “stepped-up” death benefit. Remember, that any death benefit guarantee is only as good as the insurance company that gives them.
  3. Payout Options / Guaranteed Income for Life — As its name implies, a Variable Annuity’s rate of return is not stable, but varies with the investment options in the subaccount. There is no guarantee that an investor will earn any return on their investment and there is a risk that they will lose money. Because of this risk, variable annuities are securities registered with the Securities and Exchange Commission (SEC).
  4. Other Riders — Variable Annuities are often sold with a number of add-on options (riders) that provide specific benefits. Be aware that these special features may result in additional charges to the investor in the overall annual fees and expenses of the annuity contract.

Equity-Indexed Annuities

Equity-Indexed Annuities are complex financial instruments that combine elements of both Fixed and Variable Annuities. The return on an Equity-Indexed Annuity varies more than a Fixed Annuity, but varies less than a Variable Annuity. So the risk for Equity-Indexed Annuity is somewhere between a Fixed and Variable Annuity.

Equity-Indexed Annuities combine a minimum guaranteed interest rate with another interest rate linked to a market index. The minimum guaranteed interest rate is typically a modest amount and a market index is the combined result of a number of stocks representing a specific segment of the market or the market as a whole. So while the market component of the Equity-Indexed Annuity still creates a risk (and potential losses), the minimum guaranteed interest rate may offset that risk somewhat. However, the minimum guaranteed interest rate may not even cover the costs of the surrender charges, rider expenses, and tax penalties if the investor needed to cash out their Equity-Indexed Annuity.

Regulation of Annuities

Fixed Annuities are not securities and are not regulated by the Utah Division of Securities or the Securities and Exchange Commission (SEC). Fixed Annuities are insurance products regulated by the Utah Department of Insurance.

Variable Annuities are securities regulated by the SEC. The individual sales agents should be licensed both as an insurance agent with the Utah Department of Insurance and as a broker-dealer agent with the Utah Division of Securities.

Equity-Indexed Annuities combine features of traditional insurance products (guaranteed minimum return) and traditional securities (return linked to the stock markets). Currently, Equity-Indexed Annuities are deemed to be a Fixed Annuity in Utah and are regulated by the Utah Department of Insurance, not the Utah Division of Securities. However, the SEC evaluates Equity-Indexed Annuities on a case-by-case basis and may regulate them as securities depending on the mix of features. Proposed legislation may change the way Utah regulates Equity-Indexed Annuities in the coming years.

Free Look Period

Annuity contracts typically have a “free look” period of ten or more days, during which you can terminate the insurance contract without paying any surrender charges and receive a return of your purchase payments (which may be adjusted to reflect charges and the performance of your investment). You can continue to ask questions in this period to make sure you understand your Annuity before the “free look” period ends.

Free custom financial strategy from financial advisor

A tax efficient financial plan will keep more of your money to last forever based on retirement and health threats. Email Connie Dello Buono , motherhealth@gmail.com , to have a free 30min chat with a financial advisor and receive a free custom financial strategy. Call 408-854-1883 to be scheduled this October before the end of 2014 to have a financial plan that is custom made to save your current savings and investments to protect the future.

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If you have 401K, stocks, mutual funds, Roth IRA, IRA, annuities or other kinds of assets, you need asset protection using your life insurance.

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retirment knowns and unknowns

Optimal Fixed Annuity for Retirees: Immediate versus Deferred by David Blanchett

For those who are willing to give up liquidity to maximize guaranteed income for life, the solution has always been relatively straightforward: purchase a lifetime Single Premium Immediate Annuity (SPIA).

However, in recent years, annuity companies have begin to offer Deferred Income Annuity (DIA) contracts, also known as longevity annuities, which similarly provide guaranteed income for life but an income stream that doesn’t start for years or decades into the future (i.e., the income is deferred).

The downside of the DIA approach is that the retiree still has to fill the income gap between now and when the DIA starts; the upside is that it requires far less of an investment into the DIA to get what ultimately is still income for life, because of both the years that income won’t be paid, and the opportunity to accrue both interest and mortality credits during the waiting period.

Yet with more choices now between SPIAs and DIAs – not to mention whether to include features like inflation-adjustment and death benefit riders – it becomes difficult to determine what is the “best” allocation among such contracts.

Blanchett analyzes the issue looking at various:

  • equity allocations (for the non-annuity portion)
  • the portion of income attributable to Social Security
  • the withdrawal rate, the inflation and return environment
  • the risk aversion of the retiree
  • the desire for leaving an inheritance behind
  • adjustments for anticipated life expectancy

The overall conclusion of the results is that nominal SPIAs are often most favorable, although it would only take a small increase in payout rates from DIAs to make them dominant in most situations, suggesting that if pricing for DIAs gets just a little more “competitive” (i.e., payouts improve as more companies offer such contracts and compete for retiree dollars) they may soon deserve far more consideration as a client solution.


For annuity products, call Connie Dello Buono CA Life Lic 0G60621

408-854-1883 motherhealth@gmail.com in 50 US states