Annuities are long-term financial products, issued by insurance companies, and are designed for retirement planning purposes. Generally, Annuities fall into one of two categories: Immediate and Deferred contracts.
Immediate Annuities provide an income stream for an established period of time usually related to the lifetime of one or two individuals. The income may be in differing forms: minimum payments, level payments, or increasing payments. Once an Immediate Annuity is established, the first payment is generally at the end of the period. For example, if a monthly income stream is elected, the first payment would begin 30 days after the issue date.
Immediate Annuities are the only financial vehicle that will guarantee income that cannot be outlived. This product feature is of great importance to our population of customers living longer than ever in our history. Most pension plans distribute pension income payments through the use of an Immediate Annuity that begins at retirement.
Non-qualified Immediate Annuities distribute payments as a combination of a return of principal (which is not taxable) and income related to interest accrued on that principal (which is taxable, however the tax is spread over the term of the contract). IRA Annuities do not include this tax advantage, but the distribution may satisfy the IRS Required Minimum Distribution (RMD) for the contract owner.
The interest earnings of an Immediate Annuity may be based on the general fund of the insurance company or, if the contract is a Variable Annuity, on the performance of a specified set of investments maintained in a separate account, usually bond and equity mutual funds.
The term of an Immediate Annuity may be for a lifetime, a certain period, or a combination of the two.
Deferred Annuities are insurance contracts designed for accumulating savings with a plan to eventually distribute them either as an Immediate Annuity, or as a lump sum payment. All varieties of Deferred Annuities enjoy the ability to have account values grow on a tax-deferred basis, meaning that interest earnings are not taxable until withdrawn from the contract.
The period of the Annuity may be several years and may take the form of a variety of different types of Deferred Annuity contracts.
Multi-Year Guarantee Annuity (MYGA) A MYGA is a Deferred Annuity contract in which the consumer agrees to pay a premium or series of premiums, and in return the insurance company provides the contract owner a guaranteed interest rate for a specified period of time that the owner elects. Most MYGAs provide a minimum one year guaranteed interest rate option along with multiple year rate options.
Usually at the end of the rate guaranteed period, the owner has the option to renew for another period, take a lump sum payment, or take income. There are many choices when purchasing a multi-year guarantee annuity. MYGAs are ideal for those who have a low tolerance for risk and enjoy the comfort of knowing exactly what their contract will earn from year to year.
Fixed Index Annuities (FIA) FIAs (also called Equity-Indexed Annuities) are unique products that offer some of the guarantees of a MYGA-type contract combined with the opportunity to earn interest based on changes in an external market index, such as the Standard & Poor’s 500® Index. Earnings are not affected by market index losses, but benefit from increases in the market index.
FIAs are ideal for those who wish to take advantage of upward trends in the market, but don’t want to be exposed to the risk associated with downward market fluctuations. They assure safety of the principal and, therefore, are less of a risk than a Variable Annuity.
These products offer a range of features that may include:
- Various crediting methods;
- Allocation options to earn potential indexed interest; and
Guggenheim Life does not provide legal or tax advice to policyholders or prospective policyholders. For legal or tax advice concerning your specific situation, you should consult your attorney, accountant, or tax advisor.