06/20/2024
June is annuity awareness month. Continuing from my prior post, I hope to provide some general information about annuities. This is intended to be educational, not a recommendation or endorsement of any of these types of products.
What are the types of annuities?
• Fixed annuity – these are the simplest form of annuity. With a fixed annuity, the owner of the contract commits to keeping their money with the annuity company for a specific period of time, called a surrender period. In return, the insurance company guarantees to provide a specific interest rate for a period of time and a guaranteed minimum interest rate.
o The 2 most common variations of this are:
- a fixed annuity that provides a set interest rate in year 1, and then the rate can adjust each year thereafter, but never below the guaranteed minimum interest rate.
- a multi year guaranteed annuity (MYGA) that provides a guaranteed interest rate that remains the same throughout the surrender period and then can fluctuate from year to year, but never fall below the guaranteed minimum interest rate.
• Fixed index annuity (FIA) – these annuities base the interest rate earned on the performance of an underlying index, without actually being invested in that index. For example, the interest rate earned can be tied to the performance of the S&P 500 index.
o The interest rate earned is based on a variety of factors including a floor, caps and/or participation rates.
o The floor on an FIA is 0. That simply means that if the index is negative for the covered period of time, the interest rate that will be earned is 0%.
o The cap rate is the maximum amount of interest that can be earned over the covered period of time. For example, if there is a cap of 10%, and the index being tracked was up 15%, then the interest earned for the period would be 10%.
o A participation rate credits the interest as a percentage of the rate of return of the index. For example, if a contract is using a 50% participation rate and the index being tracked was up 10%, then the interest earned for the period would be 5% (50% of 10%).
o Cap rates and participation rates can be done individually or in combination with one another depending on the annuity.
• Variable annuity – these annuities are designed to offer a menu of investment choices within 1 annuity contract. Within a variable annuity, the owner has access to subaccounts, allowing the owner to invest in various asset classes such as stocks, bonds and money markets. The interest that the owner earns will be determined by the performance of the selected subaccounts. Similar to investing in mutual funds, the rates of return can widely vary, and it is possible to lose money in this type of annuity.
• Registed index linked annuity – these annuities have similarities to fixed-index annuities and variable annuities. The interest earned will be tied to the underlying index that is being tracked. Similar to a fixed index annuity, there may be caps on the most that can be earned over a specified period of time. Similar to a variable annuity, it is possible to lose money. The major difference with this type of annuity is that they offer buffered downside protection. For example, the annuity may guarantee to protect the owner from the 1st 10% loss if the index goes down in value. In that scenario, if over the specified timeframe the index is down 8%, the owner would receive 0% interest. However, in that hypothetical example, if the index went down 15%, the owner would lose 5% (the annuity company absorbs the 1st 10% of the loss).
In the next post I’ll cover some of the things to consider with an annuity.
If you have questions, please reach out to me at 740-264-4466.
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Add: This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Annuities are complex products, and it’s important to understand the balance between all of their features and factors. A financial professional can help you decide whether an annuity is suitable for your needs.
An annuity is a contract you purchase from an insurance company, designed for long-term investing. The values will fluctuate based on investment option performance. Annuities have restrictions and limitations, and fees and charges will vary based on the product Annuity product .
Guarantees are based on the financial strength and claims-paying ability of the issuing insurer.
Surrender charges may apply to withdrawals during the surrender period. A 10% IRS penalty may apply to withdrawals prior to age 59. Annuities are not guaranteed by any bank or credit union and are not insured by the FDIC or any other federal government agency.
Variable annuities are long-term investment vehicles designed for retirement. There are risks involved when investing in a variable annuity, including possible loss of principal. Withdrawal and distributions of taxable amounts from a nonqualified variable annuity are subject to ordinary income tax and, if made prior to age 59½, may be subject to an additional 10% federal income tax penalty. Early withdrawals will reduce the death benefit and cash surrender value. Optional benefits, such as living benefits and enhanced death benefits, are available for an additional fee.
Before investing, investors should carefully consider the investment objectives, risks, charges, and expenses of the variable annuity and its underlying investment options. The current contract prospectus and underlying fund prospectuses provide this and other important information. Please contact Eugene Zrinyi to obtain the prospectuses. Please read the prospectuses carefully before investing or sending money.
A registered index-linked annuity (RILA)is a long-term insurance contract designed for retirement. A RILA allows you to participate in potential growth opportunities tied to a stock market index, while also limiting possible losses from a market downturn. RILAs are subject to investment risk, their value will fluctuate, and a loss of principal is possible. It is not meant to be used to meet short-term financial goals. If you have questions about this annuity, please ask your financial professional and consult the product prospectus.
Tax laws are complex and subject to change. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
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