As America grows older, more investors are interested in accumulating money for their retirement. If you're one of those investors, you should consider the advantages of tax-deferred annuities.
An annuity is actually an insurance contract that provides you with competitive interest rates, tax-deferred earnings and flexible withdrawal options. With an annuity, you pay absolutely no income tax on the interest your money earns as it accumulates. Because of this tax-deferred growth feature, annuities will outperform other investment instruments paying the same or even higher, but currently taxable, interest rates.
What is a Variable Annuity?
A variable annuity is an insurance contract between an individual and an insurance company which can contain several investment portfolios. After you invest in a variable annuity, it can grow, tax-deferred, until you decide to take distributions; usually in retirement, when your income needs are greatest.
As a result, variable annuities give you the flexibility, diversification and growth potential of mutual funds; and the power of tax deferral over time.
More and more people are recognizing the unusual mix of benefits that variable annuities offer. The variable annuity market has witnessed explosive growth over the past seven years.
Variable annuities can be appropriate for a wide range of investors. Younger people may be drawn to a variable annuity because they are able to purchase early and take greater advantage of tax deferral over the longterm. For investors near retirement, variable annuities are also an excellent choice. Not only do they offer a variety of distribution options, they also help keep retirees a step ahead of inflation. This is possible because, even when an investor begins drawing an income, the balance of an annuity remains invested and can continue to grow. Other advantages of variable annuities apply to all investors, young and old.
Because a variable annuity is tax-advantaged, dividends and capital gains compound without taxes until you withdraw the money; much like an IRA. And, like a nondeductible IRA, when you begin withdrawing the money for retirement, only the annuity earnings are taxable, not the money you invested. Annuities do not limit the amount you can invest to $4,000 each year.
When you do decide to take income from your variable annuity, you can choose among many distribution options. For example, you can receive payments in installments over a time period that you select, or you can receive payments for your entire lifetime. And, because your payments are split between your principal (nontaxable) and interest (taxable), tax consequences are spread out over time.
Through a variable annuity, you also gain immediate access to an investment company's professional management, research of global markets and commitment to long-range goals. As a result, you can enjoy far greater opportunities here and around the world than you could achieve on your own.
ALL ANNUITIES ARE NOT ALIKE
There are a variety of factors you should carefully consider when you purchase annuities.
Although annuities are fully guaranteed by the issuing insurance company, some companies offer a stronger guarantee than others. So, it's important for you to consider the current financial strength of the company and its future potential. There are a number of independent rating organizations that can provide you with this information. Annuities are obligations of the issuing insurance company, and are not insured by the FDIC.
Many insurance companies offer high initial rates to attract investors to their annuities. Since deferred annuities are long-term investments, you should know how long the rate is guaranteed and whether it is competitive with other offerings.
SINGLE OR INSTALLMENT PREMIUMS.
You may choose to pay your premium in a single lump sum or installments. "Flexible" installments allow you to make payments whenever you wish while "scheduled" installments specify the size and frequency of your premiums. This means you can tailor your premium payments to fit your budget.
There are a number of other provisions that you should consider:
Most deferred annuities allow you to withdraw a portion of your investment with no penalty. (If you withdraw money before age 59 1/2, you may be subject to certain tax penalties.)
If you withdraw more money than is allowed by the withdrawal provisions, the "excess" will be subject to a penalty or surrender charge. Generally, surrender charges are expressed as a percent of the excess dollar amount and decrease over a period of time.
If your rate drops a certain percent below your initial rate, some insurance companies will give you the opportunity to "bailout." No surrender charges are levied under these circumstances.
No Probate Costs
Should the annuitant die before annuity income payments begin, the beneficiary will receive the full value of your account with no penalty whatsoever. There are no delays or expenses of probate involved.
No Deposit Restrictions
Unlike an IRA (which limits your eligible retirement contributions to $4,000) annuities have no maximum deposit restrictions.
Listed below is a listing of the variable annuity companies that we do use.
AIG / American General Life Insurance
AIG / Anchor National Life/Sunamerica
Allianz Life Insurance Co of North America
Allstate / CIGNA
American National Insurance
American Skandia LIfe Assurance
American United Life Assurance Company (AUL)
Ameritas Variable Life
BMA (Business Man Association
C N A Investor Services
Delta LIfe Annuity
Equitable Life Insurance Company
Fortis Benefits Inc.
GE Capital Assurance
General American Life
ING / Northern Life Annuity
Integrity Life ( Touchstone)
Jackson National Life
Kemper / Zurich Annuities Investor Life Insurance Company
Lincoln Benefit Life
Lincoln National Life
Manufacturer's / MFS / Sun Life Of Canada
Nationwide Life Insurance Company
Nationwide / Provident Mutual Life
Ohio National Life
Pacific Fidelity Life
Phoenix Home Life
Preferred Health Systems
Principal Life Insurance
Providian Mutual Life
Safeco Life Insurance
Transamerica Insurance & Investments
Travelers Insurance Inc.
United Mutual Of Omaha
Union Central Life
US Financial Life
Western Reserve Life
Today, American Legacy has one of the longest histories among variable annuities, and accounts for more than $28 billion in assets under management.