Frequently Asked Questions 1. What is an annuity? 2. What is a fixed annuity? 3. What is an equity indexed annuity? 4. What is an immediate annuity? 5. What is a deferred annuity? 6. What are the different income or distribution options? 7. What does “annuitizing” mean? 8. What tax advantages do annuities offer? 9. How much money can a tax-deferred annuity save me? 10. What other advantages do annuities offer? 11. What are the tax implications of transferring cash-value life insurance, annuities, or 401(k) money? 12. What's the advantage of tax-deferring my money through an annuity? 13. What is the difference between a deferred and an immediate annuity? 14. What is the difference between an annuity and a Certificate of Deposit (CD)? 15. What is the difference between a mutual fund and a variable, deferred annuity? 16. How can annuities enhance my retirement plan? 17. Do annuities avoid probate? 18. When does my annuity policy mature? 19. Can there be a tax penalty for early withdrawals? 20. Do I receive a 1099 for interest earned in my annuity? 21. Is the cash value of an annuity free from creditors if the owner files for bankruptcy? 22. Can I change a beneficiary after the death of the insured? 23. If I am a beneficiary, do I have to pay income taxes on a death benefit? 24. What is the open market option? 25. How can I change my name on an annuity contract? 1. What is an annuity? An annuity is a savings vehicle issued by reputable insurance companies. Annuities offer very competitive interest rates or rates of returns. Unlike many other savings vehicles (CD’s or saving accounts) annuities offer tax-deferred growth. What is tax-deferred growth? This means that you do not pay taxes as long as your principal and interest is compounding. You can also pay a lower tax on random withdrawals because you control the tax year in which the withdrawals are made, and only pay taxes on the interest withdrawn. Tax deferral gives you control over an important expense - your taxes. Annuities can be designed to provide a lifelong stream of income which you cannot outlive. What are my income or distribution options?   There are different types of annuities, which means that an annuity can be custom tailored to fit your needs and wants. Annuities can be used as CD alternatives or investment alternatives   Fixed Annuities Equity Indexed Annuities Immediate Annuities Deferred Annuities Back to Top 2. What is a fixed annuity? Fixed annuities earn a guaranteed rate of interest for a specific time period, such as; 1, 3, 5 or 10 years. Once the guarantee period is over, you can select between a number of income options or lock in the interest for a new period of time. This guarantee of both interest and principal makes fixed annuities somewhat similar to Certificates of Deposit (CDs) purchased from a bank. Compare annuities vs. CD’s Annuities can be designed to provide a lifelong stream of income which you cannot outlive. What are the income and distribution options? Annuities are issued by reputable insurance companies and fully backed by the insurance company’s assets. Unlike CD’s, annuities are not FDIC insurance which means that your protection is not limited to $ 100,000. Back to Top 3. What is Equity Indexed annuity (EIA)? Equity indexed annuities (EIA’s) have become the most popular type of annuity. Even though EIA’s are categorized as a ‘fixed’ annuity they can be considered a safe investment alternative. How so? EIA’s participate in the stock market while guaranteeing your principal and locking in your gains. This means that you can never loose money or earned interest, even though you are ‘invested’ in the stock market. EIA’s are the only product which offers stock market related gains with the ultimate loss protection. More information on Equity Indexed Annuities Back to Top 4. What is an immediate annuity? Immediate annuities are typically funded with a one time payment. Distribution or payment of income typically begins within a month. The income payments you receive from fixed, immediate annuities are based on the amount you contribute, your age and the interest rate environment at the time of purchase. Immediate annuities can provide dependable financial security: a stream of income payments guaranteed to continue for the rest of your life or for the period of time you select. If you are about to retire, an immediate annuity may be a good place to put a lump sum of money accumulated for retirement through another savings or investment vehicle. You also can convert your deferred annuity into an immediate annuity to start receiving income. What are my income options? Back to Top 5. What is a deferred annuity? Both fixed and equity indexed annuities can be a deferred annuity. A deferred annuity allows you to postpone paying income taxes on any earnings until you withdraw money, typically during retirement, when you may be in a lower tax bracket. All earnings grow tax-deferred. You can put in as much money as you want. Unlike Individual Retirement Accounts (IRAs), there is no IRS restriction on the amount that can be contributed annually to deferred annuities with your after-tax money. You can, however, use a deferred annuity to fund your traditional or Roth IRA, in which case you would operate within IRA limitations. Deferred and immediate annuities can provide a life long, guaranteed income to you or your heirs. What income options are there? Back to Top 6. What are the different income or distribution options? You can choose from a number of options for receiving income from an immediate annuity. Lifetime income for You: You can opt for income, guaranteed by the insurance company, for the rest of your life. Payments cease upon your death. Lifetime income with a guaranteed period: You will receive income for life. If you die before the guarantee period is over, your beneficiaries will receive the remaining number of guaranteed payments. Lifetime income for two: You can opt for income guaranteed for the rest of your life and the life of another person, such as your spouse. Guaranteed income for two people is known as a joint and survivor option, which guarantees that income payments will continue for the life of the primary owner and a second person. The insurance company that issues your annuity makes the guarantee. Back to Top 7. What does “annuitizing” mean? Annuitizing basically is the conversion of a lumps sum of money into a never ending stream of income. What are the different withdrawal or distribution options? Back to Top 8. What tax advantages do annuities offer? All annuities grow tax-deferred. This means that NO taxes are due while your money is compounding. Tax deferral gives you control over an important expense - your taxes. Any time you control an expense, you can minimize it. The longer you can postpone this particular expense, the greater your rate or return will be when compared to the rate of return you would have with a fully taxable account. By postponing taxes with a tax-deferred annuity, your money compounds faster because you can earn interest on dollars that otherwise would have been paid to the IRS. You can also pay a lower tax on random withdrawals because you control the tax year in which the withdrawals are made, and only pay taxes on the interest withdrawn. Back to Top 9. How much money can a tax-deferred annuity save me?   Tax-deferred account:  Taxable account:  Initial contribution: $ 100,000  Initial contribution: $ 100,000  Interest rate: 6 %  Interest rate: 6 %  Balance after 10 years: $ 179,085  Balance after 10 years: $ 152.643  Taxes due (28 % tax-bracket): $ 11,863  Taxes due: 0  Balance after taxes: $ 167,222  Balance after taxes: $ 152,643 ANNUITY ADVANTAGE: $ 14,579 Back to Top 10. What other advantages do annuities offer? Tax advantage: All annuities grow tax-deferred. This means that NO taxes are due while your money is compounding. Tax deferral gives you control over an important expense - your taxes. Any time you control an expense, you can minimize it. The longer you can postpone this particular expense, the greater your rate or return will be when compared to the rate of return you would have with a fully taxable account. By postponing taxes with a tax-deferred annuity, your money compounds faster because you can earn interest on dollars that otherwise would have been paid to the IRS You can also pay a lower tax on random withdrawals because you control the tax year in which the withdrawals are made, and only pay taxes on the interest withdrawn. Safety of principal: Because the annuity-providing company guarantees the annuitant’s funds with their own assets, the annuitant’s funds are safe and are not subject to market fluctuations. Security: There is stability because the annuity provides stable lifetime income, which can never be outlived or could be guaranteed for a specified period of time. Simplicity: A professional at the annuity-issuing company takes care of managing your money; you do not have to manage your investments, watch markets, or do any other type of homework. Higher interest rates: The interest rates used by insurance companies to calculate immediate annuity income are generally higher than CD or Treasury rates. Also, because part of the principal is returned with each payment, greater amounts are received monthly during pay-out than would be provided if only interest was paid. Avoid probate: If a premature death should occur, the accumulating funds within your annuity may be transferred to your named beneficiaries, avoiding the expense, delay, frustration and publicity of the probate process. Like most assets, the annuity is part of your taxable estate. Your heirs may choose to receive a lump sum payment, or a guaranteed monthly income. Back to Top 11. What are the tax implications of transferring cash-value life insurance, annuities, or 401(k) money? In most cases you will be able to transfer an annuity in a life insurance policy and the cash value of a life insurance policy into an annuity. Check with your 401(k) plan administer (this is for ACTIVE 401 (k)’s only) if you can purchase an annuity within your 401 (k). You can transfer a 401 (k) rollover (when you are leaving your employer) and most other retirement funds (SEP IRA, Profit Sharing Plan, IRA, ROTH-IRA) into an annuity. Back to Top 12. What's the advantage of tax-deferring my money through an annuity? In short, the advantage is huge. You get to defer taxes that you would otherwise owe to the IRS immediately (like in a CD). Money that is in your pocket (rather than the IRS’) can earn interest and will therefore work much harder for you. What tax advantages do annuities offer? Back to Top 13. What is the difference between a deferred and an immediate annuity? The difference is the accumulation phase. A deferred annuity has an extended accumulation phase (1 – 10+ years) while the immediate annuity will provide an instant income flow. Back to Top 14. What is the difference between an annuity and a Certificate of Deposit (CD)? Annuities offer some significant advantages over CD’s, One difference is that, while annuities allow for deferral of taxes on earned interest until withdrawn, CD’s do not. Your money compounds faster with tax-deferred annuities because you can earn interest on your money which in case of a CD you would have had to pay to the IRS. In addition annuities allow you to avoid probate while CD’s will become part of the probate assets (unless a trust is used). The similarity between the two is that there is an early surrender penalty in both, certificate of deposits and tax-deferred annuities. Annuities Vs. CD’s Back to Top 15. What is the difference between a mutual fund and a variable, deferred annuity? Both mutual funds and variable annuities are subject to stock market fluctuations and possibly significant market losses. Variable annuities offer a death benefit. The value of the death benefit varies but is often a version of the highest value of the variable annuity’s account value within the last 1-5 years. The insurance company charges between 1- 4 % for this benefit in addition to the 1 – 3 % management fee. In short, variable annuities are significantly more expensive than mutual funds. Back to Top 16. How can annuities enhance my retirement plan? The most attractive feature of an annuity is that it is an excellent investment alternative, which provides a pension or a source of income for people during retirement. Annuities can either secure your retirement years or can provide you with an immediate source of income for as long as you desire. Basically, annuities give you a variety of income choices during retirement. The option of different income choices is dependent on the annuity plan. Annuities can also allow you to withdraw some percentage of money from your annuity fund. This can be done every year without paying a surrender penalty; however, certain guidelines for this type of withdrawal should be followed in accordance to the type of annuity plan you chose. In addition, some annuity plans provide a death benefit. In case you die before your income payments begin, the death benefit feature of the annuity plan allows your beneficiaries to receive equal to or more than the amount (lump sum or total premium payments) you paid when you purchased the annuity, minus any withdrawal or other fees. Annuities can also avoid probate. If a premature death should occur, the accumulating funds within your annuity may be transferred to your named beneficiaries, avoiding the expense, delay, frustration and publicity of the probate process. Like most assets, the annuity is part of your taxable estate. Your heirs may choose to receive a lump sum payment, or a guaranteed monthly income. Back to Top 17. Do annuities avoid probate? Yes, annuities can avoid probate. If a premature death should occur, the accumulating funds within your annuity may be transferred to your named beneficiaries, avoiding the expense, delay, frustration and publicity of the probate process. Like most assets, the annuity is part of your taxable estate. Your heirs may choose to receive a lump sum payment, or a guaranteed monthly income. Back to Top 18. When does my annuity policy mature? An annuity policy does not "mature" like a bond or certificate of deposit. Both your principal and interest will automatically continue to earn interest until withdrawn, or until the end of your annuity contract term. You can let your money continue to grow, make withdrawals, or begin receiving an annuity income at any time. Back to Top 19. Can there be tax penalties? An IRS penalty tax, currently 10%, may be payable on any withdrawal made prior to age 59 ½. Back to Top 20. Do I receive a 1099 for the interest earned in my annuity? There is no withholding tax and no 1099’s while your annuity is compounding; it is completely tax-deferred. If you request a distribution (random withdrawals or annuity income), taxes will be withheld - unless you elect differently. Because the interest is tax-deferred, it is not necessary to issue a Form 1099 while your money is compounding. Only when your interest is distributed (withdrawal or annuity income) will a Form 1099 be sent, reflecting the amount of interest actually received. Back to Top 21. Is the cash value of an annuity free from creditors if the owner files for bankruptcy? Bankruptcy is one of the few situations when state law supersedes federal law, so whether your cash value is protected from your creditors depends on the laws of your state. There are provisions in federal law that can protect certain types of property from creditors in bankruptcy cases, but Congress gave each state the right to develop its own rules or to decide that the federal rules are applicable. If federal bankruptcy law is applicable in your state, you can "exempt" up to $8,625 of accumulated cash value from the assets that creditors can claim. Furthermore, if you don't have or don't need the full exemption for real estate, you may also be able to protect another $8,000 of cash value from your creditors under federal bankruptcy rules. Back to Top 22. Can I change a beneficiary after the death of the insured? It's difficult but not impossible to change a beneficiary after the death of the insured. But going through a dispute can be a lengthy - and costly - process. Back to Top 23. If I am a beneficiary, do I have to pay income taxes on a death benefit? No. Death benefits from life insurance policies are free from income tax. However, the death benefit may be subject to estate and inheritance tax. Check with the agent who sold the policy, the insurance company, or your own financial planner for details. Back to Top 24. What is the open market option? The annuity market is very competitive and the rates differ between companies. You can substantially increase your pension income by purchasing your annuity from the company which pays the most income. This is called "Exercising the Open Market Option". It costs nothing to take advantage of this option and new rules introduced recently by the FSA means that insurance company must tell you about this option Back to Top 25. How can I change my name on an annuity contract? To change the name on an annuity, the current contract owner must send a signed Name Change Request form, a written request, a copy of a marriage certificate, or other court document with the necessary information to the service center.

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