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Annuities Explained

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Annuities Explained In General:
The term "annuity" by definition is simply: "A contract administered by a properly licensed and regulated insurance company." The complicated part is filtering out the ones not appropriate and suitable for your situation.

Annuities are one of the most misunderstand financial instruments there is.  Taking the time to learn about the right one for you could lead to some real financial security and possibly earn you some real profits and grow your nest egg or convert part of your next egg to a stream of income you can never outlive. You can do this without exposing yourself to the traditional capital risk associated with investments. As we get into our retirement period, we cannot replace that nest egg, and we have needs for systematic income regardless of market conditions. This is one of the reasons why annuities have become so popular. The other reason is because of the fact we are still for a while, in a very high-interest rate environment. Back in the recent past, you may have locked in a 30-year fixed mortgage when the rates were at an all-time low. So, your rate was locked in, so even though rates are higher now yours still reflects the prior low-rate period. This concept applies to some annuities, (especially the SPIA), but reversed. If you buy one now your high payout, based on today's rates (providing you an income you can never out live) will be locked in and remain the same even though rates reduce again. While I do not have a crystal ball, to know rates will become lower again, but I do see this as a real opportunity, to secure a SPIA at this time. I believe we are likely at the top of the equity (stock) market, and for those who have accumulated adequate capital it is time to convert to a stream of income with such a high payout using a SPIA (Signal Premium Immediate Annuity). For those who have not accumulated an adequate nest egg should consider a FIA (Fixed Indexed Annuity). These are the most popular TYPE of Annuities desired by clients in my client profile (age 62 to 74) which again, is the SPIA and FIA.  See my web pages labeled "SPIA Explained in Detail" and “FIA’s Explained in Detail.” These are often perceived as complex financial products, but all you need to do is set and appointment with me and I will give you a custom education just for your situation.




The Importance of Tax Deferral for Accumulation
Tax-deferred status refers to investment earnings such as interest, dividends or capital gains that accumulate tax free until the investor (annuitant) takes constructive receipt of the gains by exercising one of the withdrawal options such as lump sum, systematic withdraw or one of the annuitization options. Of course, IRAs have this feature, but normal NQ (Non-Qualified) savings and investment portfolios do not, but putting your money in a program (Taxed Deferred Indexed Annuity) like this, makes the growth become taxed deferred. I feel that risk management is the most important benefit of these plans, but the second item is the benefit of tax deferred wealth build up. No matter what your age, income or financial goals if you can isolate out the portion of your money which is long term and stash it away in one of these accounts it will not only perform better but you will avoid taxes taking a bite out of your long-term savings. So, you can postpone taxes on any earnings you make on the money in your taxed deferred accounts and then make money on that money before ultimately settle up with the IRS.  Tax deferral is a powerful way to increase your retirement income in the future. While tax deferral does help you grow your assets quicker, that is not the main point. Of course, having a bunch of money is nice, but the goal is having significantly higher retirement income in the future is really what this is all about and this program will do that.  That will help you deal with future inflation and long term-care expenses. I am able to support these statements as fact.

Again, as I said above, there are two general categories of Annuities, which are, Deferred (Accumulation) and Income (or immediate) Annuities. But, then in addition, there are two general classes of Annuities within them, which are, Fixed and Variable, then what I call a "Hybrid" the Indexed Annuity. Below I will provide some information on the structure and design of each and word my way down to the FIA (Fixed Indexed Annuity).
 
Fixed Annuities:  Have the attribute of guarantees based on the design of the product reflect that the account balance and interest are associated with guarantees and safety of principle, but I think they are a little too tame to generate any respectable, productive, favorable, fantastic or knocking the socks off returns or yield. The positive aspect is that with the Fixed Annuity contact (and Fixed Indexed Annuities as well as explained below) the Capital Risk is borne by the insurance company who underwrote the contract and insures or backs that account with its full faith, promises and in addition is backed by the General asset of that insurance company not the Annuitant. Then the Annuitant is further protected in the State of Washington for up to $500,000.00 per individual for their deposits in Fixed Annuities including the hybrid spinoff cousin the “Fixed Indexed Annuity”. You can do a Google search of “Washington Life & Disability Insurance Guaranty Association. I believe all the states have these "association" funds, and Washington has one of the best. This is "publicly" accessible information that anyone can get. I have printed this information for myself, going back to 1992. which shows it has been around for a while.     
 
Variable Annuities: Have the attributes of the underlying investments in the Variable Annuity called sub accounts, like clones of mutual funds each designed to go up and down. Of course, like Mutual funds we “hope” they all go up. They (the Mutual fund like sub accounts) are inside the annuity so they get the advantage of the same tax deferred build up but they will not build in value unless there is growth in the stock market. Again, we hope the market will go up for these products. That growth does not lock in at each anniversary date and there are huge administrative expenses in addition to the fund manager’s fees in this type of annuity which in downturn markets weigh heavy on the yields, especially in Bear markets.  With these Variable Annuities, like with a group of mutual funds it is not likely you would lose all your money, but the value can go way down and be down when you need your money. Often the market has the end result of just being flat, not having even the grown as good as a bank account would have had, nor keep up with inflation.   ALL the investment risk in Variable Annuities like Mutual Funds and stocks, is borne by the annuitant as an individual like investing directly in the market. So these products are designed to go up and down, no insurance company stands, backing up the asset and no organization stands ready to protect the individual investor annuitant (investor) from the insurance company’s insolvency like with a Fixed Annuity, as explained above.
 
Indexed Annuities: Then there is a hybrid class or type, the Indexed Annuity, which one could say in many ways, is a combination of a Fixed and Variable Annuity. These were previously called Equity-Indexed Annuities. The word “Equity” not too long ago was actually officially deleted or removed from its name to avoid a misunderstood assumption that stock market investing was present in these products. This type of tax-deferred annuity is not a direct investment in the market which by its core design, which is what, in part, does not expose you to the capital losses from the downturns of market swings.  This is the best way to protect your assets, while getting the best yield possible eliminating the need for diversification allocating a large portion in low yielding instrument for capital preservation. This increases the overall return of the account. Since there are not administrative expense, or management fees those are not present to reduce yield.
This product is not designed to go up and down like a mutual fund.
This product is backed up by the general assets of the insurance company like fixed annuities.
This product’s asset account balance is protected under the state fund for Insurance company insolvency up to $500,000.00 per individual. You can read about it on their website for more details; "Washington Life & Disability Guaranty Association" to get the information directly and not from me officially, for my compliance needs. 
 

My Selection Criteria for Product Vendor Financial Institution
An AM Best Rating of A+ or better. 
The company has existed and had the same structure for over 100 years.
Part of the criteria for my product selection and financial product vendor is they must offer one to the most generous CAP formulas in the industry. 

I personally prefer companies that are owned by the policy holders which we call Mutual Companies.

The annuity is offered to my client not subject to a MVA.


"If money can’t buy you happiness, explain yachts?"

But remember:   "If your outgo exceeds your income, your upkeep will be your downfall." 

Past Performance Is No Guarantee of Future Results!