What are annuities?
An annuity is a Retirement Investment Account set up with an insurance company who uses the investor’s premium to re-invest and accumulate interest on a tax-deferred basis.
Many investments are taxed year by year, but the investment earnings and investment income in annuities aren’t taxable until you withdraw money. Most annuities will allow you to take 10% each year from your accumulation, with no penalties. Annuities allow you to accumulate safe money.
Today, more and more people are turning to guarantee fixed rates of returns, rather than risking their principal investment in high-risk mutual funds and stocks. Americans are living longer and spending more time in retirement. In fact, the average American will be retired for approximately 18 years.
Fixed annuities are a lower risk and pay guaranteed rates of return for a specified time period and the rates of return are comparable to Certificates of Deposits (CDs).
The difference between CDs and annuities is the tax treatment. Your accumulation of interest in a CD is automatically taxed instead of deferred as in annuities. The interest on the annuity is only taxed when it is withdrawn.
Annuities share some things in common with mutual funds, but the key difference is that accumulated interest in annuities isn’t taxed until it is withdrawn, whereas, mutual funds are taxed year by year.
Who needs annuities?
- Annuities are common among people who do not have company sponsored pensions or 401K’s.Anuities also become popular when people have maxed out on their IRA or 401K and want additional tax deferred benefits.
- Retired persons who want additional retirement benefits. Immediate annuities can convert a lifetime of investments into a stream of lifetime income that only annuities provide especially for those who do not want their retirement income at risk.
- Persons who do not want a maximum contribution nor do they want a mandatory timeframe for withdrawals.
- Annuities are protected from any lawsuits and protection from creditors against your assets, giving them another edge over CD’s. Professionals look to use this approach to protect their assets.
What are different types of annuities?
There are a number of different types of annuities, enough to boggle the mind of anyone at first glance. Furthermore, the companies that issue annuities are busy creating new types of annuities everyday to meet changing needs of consumers. While deciding the kind of annuity you should purchase, keep in mind your requirements, long-term financial goals, your age, and responsibilities. Annuities have three broad methods that insurance companies use to invest your money; Fixed, Variable, and Equity Indexed.
Fixed Annuity – Pays a fixed set rate of interest, which could change periodically on the money invested in the annuity, in many cases, the annuity insurer will pay a guaranteed minimum rate of interest but also hold out the possibility that it will pay a higher rate of interest if market conditions permit. As a featured attraction many insurers will pay a bonus rate of 3% interest for the first year then pay no less than 3% guaranteed thereafter. Most insurers will usually pay closer to a Certificate of Deposit rate than the minimum 3% guaranteed. An example of a Fixed Annuity is IRA’s (Individual Retirement Accounts), including Roth IRA and Traditional IRA’s.
Roth IRA – The Roth IRA allows only non-deductible contributions and features tax free withdrawals for certain distribution reasons, after a five year holding period. Since the contributions are non-deductible and taxed in the year they are earned, if you expect to be in a higher tax bracket when you retire, you may benefit more from a Roth IRA than a Traditional IRA.
Traditional IRA – The Traditional IRA allows to defer taxes on the earnings on your contributions until they are withdrawn. Certain contributions are tax deductible in the tax year for which you make them.
Immediate Annuity – If you want and need to receive income immediately for a certain period of time or for as long as you live, you should go for an immediate annuity, which will start providing you an immediate fixed income, as soon as your funds are transferred to the annuity. This option is good especially for those who are close to retirement and need to supplement their social security. A good example of this would be a person who sells his property and wants to convert his funds into a life income.
Deferred Annuity – An annuity that does not begin payout until a later date, usually at retirement. A Deferred Annuity contract allows you to accumulate tax-deferred earnings during the term of the contract and add additional assets over time. A Deferred Annuity can be purchased with a single payment or with a periodic payment during one’s working lifetime in order to receive monthly or annual income payments during their retirement.
Variable Annuity – A Variable Annuity invests your money in stocks, bonds, and mutual funds. The income you receive is determined by the investment performance of that fund. Unlike fixed annuities, there are no guarantees that the market will perform in your favor. Your principal investment and return can suffer from a down market. Variable Annuities are regulated by the State Insurance Department and the Federal Security Exchange Commission.
Equity Indexed Annuity – This type of annuity is sort of a hybrid between a Fixed and a Variable Annuity. When you purchase an Equity-Indexed Annuity, the insurance company agrees to pay a return on your account that is tied to a stock market index, usually the S & P 500. However, the insurance company also guarantees to pay you no less than a certain return in a given period, if the return on that stock market index falls below that minimum percentage. Thus, if the stocks do well, you earn above-average returns on your annuity, and if stocks fall in value, you will not lose money as you would in many Variable Annuities.
What are my payment options?
- Single Premium – You may pay the insurance company only one payment. Usually, the funds are from a retirement nest egg, a real estate profit, or an inheritance; these are just a few examples.
- Multiple Premium – You make a series of payments to the insurance companies. There are two kinds of multiple premium annuities:
- Flexible Premium Contract – Within set limits you pay as much premium as you want, whenever you want.
- Scheduled Premium Annuity – The contract spells out your payments and how often you will make them.
What are the tax treatments of annuities?
Annuities receive special tax treatment under current Federal Law. The income created from annuities is tax deferred, which means that you are not taxed on your money earned as long as it stays in the annuity. Remember, it is tax deferred, not tax-free.
There is a 10% penalty, if you withdraw your accumulations before the age of 59 ½. Annuities are structured as retirement plans and an early withdrawal is discouraged with this penalty. However, on most annuities you are allowed a 10% free withdrawal of the principal each year.
At retirement part of the payments you receive from an annuity will be considered as a return of the premium you pay. You won’t have to pay tax on that part. The interest that you collect will be taxed, based on your retirement income, which should be far less than your working income, which will work in your favor.
How is the interest calculated?
During the accumulation period your money earns interest at rates that change from time to time, these rates will be entirely up to the insurance company and you can always request a past performance history of their interest payments.
What if I need to cash out my money?
If you need to access your money, your insurance company provides a surrender charge table in your contract. This surrender charge is on a declining table inserted under “surrender charges” in your policy. It usually starts at 10% and reduces over a five to nine year period. An early surrender of your investment would result in a loss, so be very careful to review the need of these funds before purchasing an annuity. The Surrender Charge will be waived in the event of death.
As mentioned above, 10% free withdrawals are available each year of your accumulated value without a surrender charge. Otherwise, withdrawals prior to age 59½ are subject to 10% Federal Tax Penalty.
Terminal Illness Rider allows you to withdraw the entire accumulated value or $250,000, whichever is less, without a surrender charge. Terminal illness is defined as a medical condition where you become terminal within twelve (12) months. Diagnosis must be made by a U.S. Licensed Physician and the company has the right to order a second opinion, at it’s own cost, by a physician of choice.
In the event of death, surrender charges and market value adjustment will not apply. The entire accumulated value will be paid to a beneficiary of your choice; if no beneficiary is named then the proceeds go to your estate.
What we offer:
An Annuity is only as good as the company issuing it. Computer printouts can only show how an insurance company hopes its annuities will perform. Jackson National Life Insurance Company has a record of interest payouts that speaks for itself. For a free copy of the record to examine the history and see for yourself how JNL annuities have performed, contact our Life and Health Department at (504) 441-SAVE (7283) or get a quote.
About Jackson National Life:
- One of America’s largest insurance companies, with more than $146 billion of life insurance in force.
- Nearly $26 billion in assets.
- The 20th largest life insurance company in the U.S. (by assets).
- One of America’s leading annuity writers, with more than $2 billion of annuity new business in 1995.
- Nearly 1.8 million policies in force nationwide.
- Wholly owned by England’s Prudential Corporation plc, founded in 1848, one of the world’s largest insurance organizations (nor affiliated with Prudential Insurance Company of America).
- Want to know more? Ask your JNL Representative, Dan Burghardt Insurance at (504) 441-SAVE (7283).
Jackson National’s Annuities Offer You:
- Competitive current interest – ask your JNL representative for our current rate.
- Guaranteed lifetime income – isn’t that what retirement planning is all about?
- More retirement income per premium dollar – JNL’s annuitization factors, which determine annuity income, are among the most generous around.
- Protection of principal – there’s no investment market risk to your premiums.
- Tax-deferred cash accumulation – you don’t pay current income tax on your interest earnings until withdrawn.
- Guaranteed interest rate – 3%
- Freedom from fees, loads, charges – 100% of your premium can earn Jackson National’s competitive current interest! JNL’s annuities impose no front-end sales loads (commissions) and no policy fee. There are no annual administrative charges on single premium annuities or, with a minimum annual premium, on flexible premium annuities. An annually declining back-end surrender charge is assessed only against funds withdrawn prematurely.
- An ideal funding vehicle – for IRA’s, Keogh plans, 401(k)s, tax-sheltered annuities, and any other retirement savings plan.