An annuity is a financial contract sold by insurance companies. They are designed to invest and grow money for an individual and at some time in the future pay principal and gain to named beneficiaries, or the annuitant. The payout typically is on a frequent basis, usually monthly or quarterly, although it could be a lump-sum.
There are several types of annuities available to our clients and determining suitability is the most important aspect of the decision making process. Here are the types of annuities available through BlueSkye:
Fixed annuities grow at a "fixed" rate of return for a certain term or number of years, in similar fashion to a bank certificate of deposit. However, annuities are NOT FDIC insured and are only guaranteed by the claims paying ability of the annuity carrier.
Fixed Indexed Annuities
Fixed Index Annuities use a market "index" such as the S&P 500 to credit the annuity. These types of annuities usually have a "cap" or maximum amount which they will credit, say for example 5%. This means that if the market index rises by 5% the annuity will be credited by that same number. However, if the index rises 10%, the annuity will only be credited up to the cap of 5%. The insurance company retains any profits. Conversely, if the index declines for that measurement period, then the annuity value does not decline in value. It remains constant, pursuant to the annuity contract.
An Immediate Annuity is an insurance-based type that annuitizes the premium amount over a specified period of time, or over the life of the annuitant. These annuities are not indexed and are not used to create cash value over time. They are simply a way to control and measure income to a person/entity over time. They are very practical for estate planning purposes or for distributing large sums of money without having to manage accounting within the estate.
Typical Benefits of Annuities
All annuities grow value on a tax-deferred basis, meaning that no federal taxes are due as long as there are no withdrawals. Any withdrawals prior to the annuitants age of 59½ will incur a penalty tax of ten percent (10%) on the money withdrawn in addition to the normal income tax on withdrawal. The only exception is the Immediate Annuity, which is viewed as a return of principal, unless distributed to a named beneficiary.