Text Size:   A+ A- A   •   Text Only

Annuities

An annuity is a contract between you and an insurance company under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at a future date. Typically, annuities offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a guaranteed minimum amount, at least the amount of your purchase payments.

There are generally three types of annuities — fixed, variable, and immediate. In a fixed annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your account is growing. The insurance company also guarantees that the periodic payments will be a guaranteed amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

In a variable annuity, by contrast, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your investment and the amount of the periodic payments you will eventually receive will vary depending on the performance of the investment options you have selected. Like other investments you will receive a prospectus.

With an immediate annuity you give the insurance company a specific amount of money, $100,000, and they guarantee to pay you a specified payment for a definite period of time, such as 20 years or for your life. The amount you will receive is based on the amount on deposit with the insurance company and the length of time you will expect to receive payments. Some contracts allow for your beneficiaries to receive the remaining value of the annuity after you die.

Who can sell annuities? As mentioned previously, insurance companies, through agents, can sell annuities. Additionally, brokers, financial planners, or other financial professionals can sell annuities as long as they, and the insurance agents, are licensed to sell them.

Annuity contracts usually have a “free look” period of 10 days or more where you can terminate the contract without paying any surrender charges, and get back your purchase payments. During this time you have the right to ask questions to make sure you understand your contract annuity before the “free look” period ends. Remember an annuity is a long-term investment with substantial surrender charges, therefore you should never invest 100 percent of your liquid assets in an annuity.

Annuity Advice

  • All annuities are designed to be long-term investments to meet retirement or other long-range goals, except for immediate annuities. Annuities are not suitable for meeting short-term goals as there are substantial taxes, and insurance company charges called "surrender charges"that may apply if you withdraw the money early. And, just like other investments, variable annuities involve risks. Annuities are not usually suitable for anyone close to retirement or in retirement.

  • Anyone who sells annuities is required to conduct a reasonable inquiry of your needs, goals, financial status, age, and other relevant information to determine the suitability of the annuity before recommending a purchase. Make sure you clearly understand all policy provisions, administrative fees, sub-account fees, and surrender schedules that apply to the product recommended to you. If you are purchasing a variable annuity it’s important that you read and understand the prospectus — even the fine print — before you make the purchase.

  • Consult a tax adviser and consider all the tax consequences in purchasing an annuity, including the effect of annuity payments on your tax status in retirement.

  • If you own an annuity and want to exchange it for a different one, be careful. Regardless of whether or not your surrender period has expired on your current annuity, a new surrender period will generally begin when you exchange the old contract for the new contract. This mean you could forfeit your ability to withdraw money from your account without substantial surrender charges. Make sure you understand how your insurance agent or financial adviser is paid. You will want to know all the fees and commissions before you commit.

  • Other investment options, such as IRAs and employer-sponsored 401(k) plans, also may provide tax-deferred growth and other tax advantages. For most investors, it will be advantageous to make the maximum allowable contributions to IRAs and 401(k) plans before investing in an annuity.

  • Above all else, never purchase any investment on the day it is offered. Give yourself time to consult with your tax adviser and attorney. Remember if it has to be purchased today, it is not worth purchasing.

Return to protectyourmoneyoregon.org