Annuity may refer to:Annuity (finance theory), (Payout phase) any recurring periodic series of payments Annuity (finance theory) (Accumulation phase) a tax deferred savings vehicle Annuity (financial contracts), an insurance-like contract providing Monthly, Quarterly, Semi-Annual or Annual paymentsAnnuity (US financial products)Annuity (European financial arrangements)Life annuity (also single payment annuity), a financial contract providing payments for a person's lifetimeAnnuity, a maintenance fee (patent) in patent law An annuity that has no definite end is called a perpetuity This disambiguation page lists articles associated with the same title If an internal link led you here, you may wish to change the link to point directly to the intended article Perhaps confusingly, the majority of modern annuity customers use annuities only to accumulate funds and to take lump-sum withdrawals without using the guaranteed-income-for-life feature Annuity contracts in the United States are defined by the Internal Revenue Code and regulated by the individual states Variable annuities have features of both life insurance and investment products , annuity contracts may be issued only by life insurance companies, although private annuity contracts may be arranged between donors to non-profits to reduce taxes Insurance companies are regulated by the states, so contracts or options that may be available in some states may not be available in others Their federal tax treatment, however, is governed by the Internal Revenue Code Variable annuities are regulated by the Securities and Exchange Commission and the sale of variable annuities is overseen by FINRA(The largest non-governmental regulator for all securities firms doing business in the United States) There are two possible phases for an annuity, one phase in which the customer deposits and accumulates money into an account (the deferral phase), and another phase in which customers receive payments for some period of time (the annuity or income phase) During this latter phase, the insurance company makes income payments that may be set for a stated period of time, such as five years, or continue until the death of the customer(s) (the "annuitant(s)") named in the contract Annuitization over a lifetime can have a death benefit guarantee over a certain period of time, such as ten years Annuity contracts with a deferral phase always have an annuity phase and are called deferred annuities An annuity contract may also be structured so that it has only the annuity phase; such a contract is called an immediate annuity The term "annuity," as used in financial theory, is most closely related to what is today called an immediate annuity This is an insurance policy which, in exchange for a sum of money, guarantees that the issuer will make a series of payments These payments may be either level or increasing periodic payments for a fixed term of years or until the ending of a life or two lives, or even whichever is longer It is also possible to structure the payments under an immediate annuity so that they vary with the performance of a specified set of investments, usually bond and equity mutual funds Such a contract is called a variable immediate annuity The overarching characteristic of the immediate annuity is that it is a vehicle for distributing savings with a tax-deferred growth factor A common use for an immediate annuity might be to provide a pension income , the tax treatment of an immediate annuity is that every payment is a combination of a return of principal (which part is not taxed) and income (which is taxed at ordinary income rates, not capital gain rates) When a deferred annuity is annuitized, it works like an immediate annuity from that point on, but with a lower cost basis and thus more of the payment is taxed This type of immediate annuity pays the annuitant for a designated number of years (i , a period certain) and is used to fund a need that will end when the period is up (for example, it might be used to fund the premiums for a term life insurance policy) Thus this option is not necessarily suitable for an individual's retirement income, as the person may outlive the number of years the annuity will pay A life or lifetime immediate annuity is used to provide an income for the life of the annuitant similar to a defined benefit or pension plan A life annuity works somewhat like a loan that is made by the purchaser (contract owner) to the issuing (insurance) company, which pays back the original capital or principal (which isn't taxed) with interest and/or gains (which is taxed as ordinary income) to the annuitant on whose life the annuity is based The assumed period of the loan is based on the life expectancy of the annuitant In order to guarantee that the income continues for life, the insurance company relies on a concept called cross-subsidy or the "law of large numbers" Because an annuity population can be expected to have a distribution of lifespans around the population's mean (average) age, those dying earlier will give up income to support those living longer whose money would otherwise run out A life annuity, ideally, can reduce the "problem" faced by a person that he/she doesn't know how long he/she will live, and so he/she doesn't know the optimal speed at which to spend his/her savings Life annuities with payments indexed to the Consumer Price Index might be an acceptable solution to this problem, but there is only a thin market for them in North America For an additional expense (either by way of an increase in payments (premium) or a decrease in benefits), an annuity or benefit rider can be purchased on another life such as a spouse, family member or friend for the duration of whose life the annuity is wholly or partly guaranteed For example, it is common to buy an annuity which will continue to pay out to the spouse of the annuitant after death, for so long as the spouse survives The annuity paid to the spouse is called a reversionary annuity or survivorship annuity However, if the annuitant is in good health, it may be more advantageous to select the higher payout option on his or her life only and purchase a life insurance policy that would pay income to the survivor The pure life annuity can have harsh consequences for the annuitant who dies before recovering his or her investment in the contract Such a situation, called a forfeiture, can be mitigated by the addition of a period-certain feature under which the annuity issuer is required to make annuity payments for a least a certain number of years; if the annuitant outlives the specified period certain, annuity payments continue until the annuitant's death, and if the annuitant dies before the expiration of the period certain, the annuitant's estate or beneficiary is entitled to the remaining payments certain The tradeoff between the pure life annuity and the life-with-period-certain annuity is that the annuity payment for the latter is smaller A viable alternative to the life-with-period-certain annuity is to purchase a single-premium life policy that would cover the lost premium in the annuity Impaired-life annuities for smokers or those with a particular illness are also available from some insurance companies Since the life expectancy is reduced, the annual payment to the purchaser is raised Life annuities are priced based on the probability of the annuitant surviving to receive the payments Longevity insurance is a form of annuity that defers commencement of the payments until very late in life A common longevity contract would be purchased at or before retirement but would not commence payments until 20 years after retirement If the nominee dies before payments commence there is no payable benefit This drastically reduces the cost of the annuity while still providing protection against outliving one's resources The second usage for the term annuity came into being during the 1970s Such a contract is more properly referred to as a deferred annuity and is chiefly a vehicle for accumulating savings with a view to eventually distributing them either in the manner of an immediate annuity or as a lump-sum payment All varieties of deferred annuities owned by individuals have one thing in common: any increase in account values is not taxed until those gains are withdrawn This is also known as tax-deferred growth A deferred annuity which grows by interest rate earnings alone is called a fixed deferred annuity (FA) A deferred annuity that permits allocations to stock or bond funds and for which the account value is not guaranteed to stay above the initial amount invested is called a variable annuity (VA) A new category of deferred annuity, called the equity indexed annuity (EIA) emerged in 1995 [2] Equity indexed annuities may have features of both fixed and variable deferred annuities The insurance company typically guarantees a minimum return for EIA An investor can still lose money if he or she cancels (or surrenders) the policy early, before a "break even" period An oversimplified expression of a typical EIA's rate of return might be that it is equal to a stated "participation rate" multiplied by a target stock market index's performance excluding dividends Interest rate caps or an administrative fee may be applicable Deferred annuities in the United States have the advantage that taxation of all capital gains and ordinary income is deferred until withdrawn In theory, such tax-deferred compounding allows more money to be put to work while the savings are accumulating, leading to higher returns A disadvantage, however, is that when amounts held under a deferred annuity are withdrawn or inherited, the interest/gains are immediately taxed as ordinary income A variety of features and guarantees have been developed by insurance companies in order to make annuity products more attractive These include death and living benefit options, extra credit options, account guarantees, spousal continuation benefits, reduced contingent deferred sales charges (or surrender charges), and various combinations thereof Each feature or benefit added to a contract will typically be accompanied by an additional expense either directly (billed to client) or indirectly (inside product) Deferred annuities are usually divided into two different kinds:Fixed annuities offer some sort of guaranteed rate of return over the life of the contract In general such contracts are often positioned to be somewhat like bank CDs and offer a rate of return competitive with those of CDs of similar time frames Many fixed annuities, however, do not have a fixed rate of return over the life of the contract, offering instead a guaranteed minimum rate and a first year introductory rate The rate after the first year is often an amount that may be set at the insurance company's discretion subject, however, to the minimum amount (typically 3%) There are usually some provisions in the contract to allow a percentage of the interest and/or principal to be withdrawn early and without penalty (usually the interest earned in a 12-month period or 10%), unlike most CDs Fixed annuities normally become fully liquid upon the owner's death Most equity index annuities are properly categorized as fixed annuities and their performance is typically tied to a stock market index (usually the S&P 500 or the Dow Jones Industrial Average) These products are guaranteed but are not as easy to understand as standard fixed annuities as there are usually caps, spreads, margins, and crediting methods that can reduce returns These products also don't pay any of the participating market indices' dividends; the trade-off is that contract holder can never earn less than 0% in a negative year Variable annuities allow money to be invested in insurance company "separate accounts" (which are sometimes referred to as "subaccounts" and in any case are functionally similar to mutual funds) in a tax-deferred manner [3] Their primary use is to allow an investor to engage in tax-deferred investing for retirement in amounts greater than permitted by individual retirement or 401(k) plans In addition, many variable annuity contracts offer a guaranteed minimum rate of return (either for a future withdrawal and/or in the case of the owner's death), even if the underlying separate account investments perform poorly This can be attractive to people uncomfortable investing in the equity markets without the guarantees Of course, an investor will pay for each benefit provided by a variable annuity, since insurance companies must charge a premium to cover the insurance guarantees of such benefits Variable annuities are regulated both by the individual states (as insurance products) and by the Securities and Exchange Commission (as securities under the federal securities laws) The SEC requires that all of the charges under variable annuities be described in great detail in the prospectus that is offered to each variable annuity customer Of course, potential customers should review these charges carefully, just as one would in purchasing mutual fund shares People who sell variable annuities are usually regulated by FINRA, whose rules of conduct require a careful analysis of the suitability of variable annuities (and other securities products) to those to whom they recommend such products These products are often criticized as being sold to the wrong persons, who could have done better investing in a more suitable alternative, since the commissions paid under this product are often high relative to other investment products There are several types of performance guarantees, and one may often choose them a la carte, with higher risk charges for guarantees that are riskier for the insurance companies The first type is comprised of guaranteed minimum death benefits (GMDBs), which can be received only if the owner of the annuity contract, or the covered annuitant, dies GMDBs come in various flavors, in order of increasing risk to the insurance company:Return of premium (a guarantee that you will not have a negative return)Roll-up of premium at a particular rate (a guarantee that you will achieve a minimum rate of return, greater than 0)Maximum anniversary value (looks back at account value on the anniversaries, and guarantees you will get at least as much as the highest values upon death)Greater of maximum anniversary value or particular roll-up Insurance companies provide even greater insurance coverage on guaranteed living benefits, which tend to be elective Unlike death benefits, which the contractholder generally can't time, living benefits pose significant risk for insurance companies as contractholders will likely exercise these benefits when they are worth the most Annuities with guaranteed living benefits (GLBs) tend to have high fees commensurate with the additional risks underwritten by the issuing insurer Some GLB examples, in no particular order:Guaranteed minimum income benefit (a guarantee that one will get a minimum income stream upon annuitization at a particular point in the future)Guaranteed minimum accumulation benefit (a guarantee that the account value will be at a certain amount at a certain point in the future)Guaranteed minimum withdrawal benefit (a guarantee similar to the income benefit, but one that doesn't require annuitizing)Guaranteed-for-life income benefit (a guarantee similar to a withdrawal benefit, but will pay you for as long as you live and does not require annuitization) Deferred annuities are generally sold by financial professionals, some of whom may work directly for an insurance company Most financial professionals, however, are independent agents of the insurance company, not employees The financial professional who sells an annuity collects a commission from the insurance company This commission will be a percentage of the total premium paid by the investor This percentage can be as little as 1% and as high as 12%; the average is 6% Since these commissions appear high and there are deferred sales charges on annuities, many financial gurus have criticized annuity products The investor will, generally, not pay any of this commission directly to the financial professional; the commission is paid by the insurance company to the financial professional up front The insurance company will recapture the commission paid to the financial professional through the fees charged to the customer (in a variable or equity indexed annuity) or the spread in the interest rate market (for a fixed annuity) There are also deferred back-end charges that will be applied if the investor closes out his or her contract before the agreed-upon time frame, usually 8 years These charges can last for as little as 1 year or as many as 20 years, depending on the type of annuity and issuing company These back-end charges concern many financial professionals and financial gurus Some annuities do not have any deferred surrender charges and do not pay the financial professional a commission, although the financial professional may charge a fee for his or her advice These contracts are called "no-load" variable annuity products and are usually available from a fee-based financial planner or directly from a no-load mutual fund company Of course various charges are still imposed on these contracts, but they are less than those sold by commissioned brokers It is important that potential purchasers -- of annuities, mutual funds, tax-exempt municipal bonds, commodities futures, interest-rate swaps, in short, any financial instrument -- understand the fees on the product and the fees a financial planner may charge Variable annuities are controversial because many believe the extra fees (i , the fees above and beyond those charged for similar retail mutual funds that offer no principal protection or guarantees of any kind) may reduce the rate of return compared to what the investor could make by investing directly in similar investments outside of the variable annuity A big selling point for variable annuities is the guarantees many have, such as the guarantee that the customer will not lose his or her principal Critics say that these guarantees are not necessary because over the long term the market has always been positive, while others say that with the uncertainty of the financial markets many investors simply will not invest without guarantees Past returns are no guarantee of future performance, of course, and different investors have different risk tolerances, different investment horizons, different family situations, and so on The sale of any security product should involve a careful analysis of the suitability of the product for a given individual A controversial practice of insurance sales is the selling of insurance contracts within an IRA or 401(k) plan Since these investment vehicles are already tax deferred, investors do not receive additional tax shelters from the annuities The benefit of the annuity contract is the guaranteed lifetime income that all annuity contracts must have by state law Approximately 90% of annuitants, however, have not taken the life annuity upon retirement If an investor does not intend to take the life income option from an annuity contract at retirement he or she may want to consider a low-cost deferred annuity If an investor needs to take lifetime income at retirement, on the other hand, he or she may want to try to buy an annuity upon retirement or might consider selecting a 401(k) plan account with an option to buy the annuity just before retirement [4] examined the effects of taxation on annuities relative to other investment vehicles The author found that annuities are generally not effective as a tax-deferral vehicle and that there are significant flaws in the use of annuities for financial planning during the accumulation phase Internal Revenue Code, the growth of the annuity value during the accumulation phase is tax-deferred, that is, not subject to current income tax, for annuities owned by individuals The tax deferred status of deferred annuities has led to their common usage in the United States tax code, the benefits from annuity contracts do not always have to be taken in the form of a fixed stream of payments (annuitization), and many of annuity contracts are bought primarily for the tax benefits rather than to receive a fixed stream of income If an annuity is used in a qualified pension plan or an IRA funding vehicle, then 100% of the annuity payment is taxable as current income upon distribution (because the taxpayer has no tax basis in any of the money in the annuity) If the annuity contract is purchased with after-tax dollars, then the contractholder upon annuitization recovers his basis pro-rata in the ratio of basis divided by the expected value, according to the tax regulation Section 1 (This is commonly referred to as the exclusion ratio ) After the taxpayer has recovered all of his basis, then 100% of the payments thereafter are subject to ordinary income tax Since the Jobs and Growth Tax Relief Reconciliation Act of 2003, the use of variable annuities as a tax shelter has greatly diminished, because the growth of mutual funds and now most of the dividends of the fund are taxed at long term capital gains rates This taxation, contrasted with the taxation of all the growth of variable annuities at income rates, means that in most cases, variable annuities shouldn't be used for tax shelters unless very long holding periods apply (for example, more than 20 years) Also, any withdrawals before an investor reaches the age of 59 ½ are generally subject to a 10% tax penalty in addition to any gain being taxed as ordinary income [edit] Insurance company default risk and state guaranty associations An investor should consider the financial strength of the insurance company that writes annuity contracts Major insolvencies have occurred at least 62 times since the conspicuous collapse of the Executive Life Insurance Company in 1991 Insurance company defaults are governed by state law The laws are, however, broadly similar in most states Annuity contracts are protected against insurance company insolvency up to a specific dollar limit, often $100,000, but as high as $500,000 in New York[6], New Jersey[7], and the state of Washington[8] This protection is not insurance and is not provided by a government agency It is provided by an entity called the state Guaranty Association When an insolvency occurs, the Guaranty Association steps in to protect annuity holders, and decides what to do on a case-by-case basis Sometimes the contracts will be taken over and fulfilled by a solvent insurance company The state Guaranty Association is not a government agency, but states usually require insurance companies to belong to it as a condition of being licensed to do business The Guaranty Associations of the fifty states are members of a national umbrella association, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) The NOLHGA website provides a description of the organization, links to websites for the individual state organizations, and links to the actual text of the governing state laws A difference between guaranty association protection and the protection e of bank accounts by FDIC, credit union accounts by NCUA, and brokerage accounts by SIPC, is that it is difficult for consumers to learn about this protection Usually, state law prohibits insurance agents and companies from using the guaranty association in any advertising and agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance(e Presumably this is a response to concerns by stronger insurance companies about moral hazard Deferred annuities, including fixed, equity indexed and variable, typically pay the advisor or salesperson 1 percent to 12 percent of the amount invested as a commission, with possible trail options of 25 basis points to 1 percent Sometimes the advisor can select his payout option, which might be either 7 percent up front, or 5 percent up front with a 25 basis point trail, or 1 percent to 3 percent up front with a 1 percent trail Some firms allow an investor to pick an annuity share class, which determines the salesperson's commission schedule The main variables are the up-front commission and the trailing commission "No-load" variable annuities are available on a direct-to-consumer basis from several no-load mutual fund companies "No-load" means the products have no sales commissions or surrender charges Even these lower cost variable annuities often make sense only after an investor has exhausted all other forms of tax shelters, and only if being held for quite some time Fixed and Indexed Annuity commissions are paid by the insurance companies the licensed agent represents Commissions are not paid out of the clients principal An examination of variable annuity investment versus investing outside of annuitiesRetrieved from "http://en An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a guaranteed minimum amount, such as your total purchase payments There are generally two types of annuitiesfixed and variable In a fixed annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your account is growing The insurance company also guarantees that the periodic payments will be a guaranteed amount per dollar in your account These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse In a variable annuity, by contrast, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds The rate of return on your purchase payments, and the amount of the periodic payments you will eventually receive, will vary depending on the performance of the investment options you have selected An equity-indexed annuity is a special type of annuity During the accumulation period when you make either a lump sum payment or a series of payments the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index The insurance company typically guarantees a minimum return After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum Variable annuities are securities regulated by the SEC Fixed annuities are not securities and are not regulated by the SEC Equity-indexed annuities combine features of traditional insurance products (guaranteed minimum return) and traditional securities (return linked to equity markets) Depending on the mix of features, an equity-indexed annuity may or may not be a security The typical equity-indexed annuity is not registered with the SEC You can learn more about variable annuities by reading our publication, Variable Annuities: What You Should Know You can learn more about equity-indexed annuities by reading our online brochure, which explains equity-indexed annuities and provides resources for obtaining additional information Before you buy a variable annuity, you should know some of the basics – and be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a variable annuity is right for you This is a general description of variable annuities – what they are, how they work, and the charges you will pay Before buying any variable annuity, however, you should find out about the particular annuity you are considering Request a prospectus from the insurance company or from your financial professional, and read it carefully The prospectus contains important information about the annuity contract, including fees and charges, investment options, death benefits, and annuity payout options You should compare the benefits and costs of the annuity to other variable annuities and to other types of investments, such as mutual funds A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments A variable annuity offers a range of investment options The value of your investment as a variable annuity owner will vary depending on the performance of the investment options you choose The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three Although variable annuities are typically invested in mutual funds, variable annuities differ from mutual funds in several important ways:First, variable annuities let you receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate) This feature offers protection against the possibility that, after you retire, you will outlive your assets Second, variable annuities have a death benefit If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount – typically at least the amount of your purchase payments Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money You may also transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer When you take your money out of a variable annuity, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates In general, the benefits of tax deferral will outweigh the costs of a variable annuity only if you hold it as a long-term investment to meet retirement and other long-range goals Other investment vehicles, such as IRAs and employer-sponsored 401(k) plans, also may provide you with tax-deferred growth and other tax advantages For most investors, it will be advantageous to make the maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity In addition, if you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401(k) plan or IRA), you will get no additional tax advantage from the variable annuity Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity's other features, such as lifetime income payments and death benefit protection The tax rules that apply to variable annuities can be complicated – before investing, you may want to consult a tax adviser about the tax consequences to you of investing in a variable annuity Remember:  Variable annuities are designed to be long-term investments, to meet retirement and other long-range goals Variable annuities are not suitable for meeting short-term goals because substantial taxes and insurance company charges may apply if you withdraw your money early Variable annuities also involve investment risks, just as mutual funds do How Variable Annuities Work A variable annuity has two phases: an accumulation phase and a payout phase During the accumulation phase, you make purchase payments, which you can allocate to a number of investment options For example, you could designate 40% of your purchase payments to a bond fund, 40% to a U stock fund, and 20% to an international stock fund The money you have allocated to each mutual fund investment option will increase or decrease over time, depending on the fund's performance In addition, variable annuities often allow you to allocate part of your purchase payments to a fixed account A fixed account, unlike a mutual fund, pays a fixed rate of interest The insurance company may reset this interest rate periodically, but it will usually provide a guaranteed minimum (e Example:  You purchase a variable annuity with an initial purchase payment of $10,000 You allocate 50% of that purchase payment ($5,000) to a bond fund, and 50% ($5,000) to a stock fund Over the following year, the stock fund has a 10% return, and the bond fund has a 5% return At the end of the year, your account has a value of $10,750 ($5,500 in the stock fund and $5,250 in the bond fund), minus fees and charges (discussed below) Your most important source of information about a variable annuity's investment options is the prospectus Request the prospectuses for the mutual fund investment options Read them carefully before you allocate your purchase payments among the investment options offered You should consider a variety of factors with respect to each fund option, including the fund's investment objectives and policies, management fees and other expenses that the fund charges, the risks and volatility of the fund, and whether the fund contributes to the diversification of your overall investment portfolio Another SEC online publication, Invest Wisely: An Introduction to Mutual Funds, provides general information about the types of mutual funds and the expenses they charge During the accumulation phase, you can typically transfer your money from one investment option to another without paying tax on your investment income and gains, although you may be charged by the insurance company for transfers However, if you withdraw money from your account during the early years of the accumulation phase, you may have to pay "surrender charges," which are discussed below In addition, you may have to pay a 10% federal tax penalty if you withdraw money before the age of 59½ At the beginning of the payout phase, you may receive your purchase payments plus investment income and gains (if any) as a lump-sum payment, or you may choose to receive them as a stream of payments at regular intervals (generally monthly) If you choose to receive a stream of payments, you may have a number of choices of how long the payments will last Under most annuity contracts, you can choose to have your annuity payments last for a period that you set (such as 20 years) or for an indefinite period (such as your lifetime or the lifetime of you and your spouse or other beneficiary) During the payout phase, your annuity contract may permit you to choose between receiving payments that are fixed in amount or payments that vary based on the performance of mutual fund investment options The amount of each periodic payment will depend, in part, on the time period that you select for receiving payments Be aware that some annuities do not allow you to withdraw money from your account once you have started receiving regular annuity payments In addition, some annuity contracts are structured as immediate annuities, which means that there is no accumulation phase and you will start receiving annuity payments right after you purchase the annuity The Death Benefit and Other Features A common feature of variable annuities is the death benefit If you die, a person you select as a beneficiary (such as your spouse or child) will receive the greater of: (i) all the money in your account, or (ii) some guaranteed minimum (such as all purchase payments minus prior withdrawals) Example: You own a variable annuity that offers a death benefit equal to the greater of account value or total purchase payments minus withdrawals You have made purchase payments totaling $50,000 In addition, you have withdrawn $5,000 from your account Because of these withdrawals and investment losses, your account value is currently $40,000 If you die, your designated beneficiary will receive $45,000 (the $50,000 in purchase payments you put in minus $5,000 in withdrawals) Some variable annuities allow you to choose a  "stepped-up" death benefit Under this feature, your guaranteed minimum death benefit may be based on a greater amount than purchase payments minus withdrawals For example, the guaranteed minimum might be your account value as of a specified date, which may be greater than purchase payments minus withdrawals if the underlying investment options have performed well The purpose of a stepped-up death benefit is to "lock in" your investment performance and prevent a later decline in the value of your account from eroding the amount that you expect to leave to your heirs This feature carries a charge, however, which will reduce your account value Variable annuities sometimes offer other optional features, which also have extra charges One common feature, the  guaranteed minimum income benefit, guarantees a particular minimum level of annuity payments, even if you do not have enough money in your account (perhaps because of investment losses) to support that level of payments Other features may include long-term care insurance, which pays for home health care or nursing home care if you become seriously ill You may want to consider the financial strength of the insurance company that sponsors any variable annuity you are considering buying This can affect the company's ability to pay any benefits that are greater than the value of your account in mutual fund investment options, such as a death benefit, guaranteed minimum income benefit, long-term care benefit, or amounts you have allocated to a fixed account investment option You will pay for each benefit provided by your variable annuity Carefully consider whether you need the benefit If you do, consider whether you can buy the benefit more cheaply as part of the variable annuity or separately (e , through a long-term care insurance policy) Variable Annuity Charges You will pay several charges when you invest in a variable annuity Be sure you understand all the charges before you invest These charges will reduce the value of your account and the return on your investment Surrender charges – If you withdraw money from a variable annuity within a certain period after a purchase payment (typically within six to eight years, but sometimes as long as ten years), the insurance company usually will assess a "surrender" charge, which is a type of sales charge This charge is used to pay your financial professional a commission for selling the variable annuity to you Generally, the surrender charge is a percentage of the amount withdrawn, and declines gradually over a period of several years, known as the "surrender period " For example, a 7% charge might apply in the first year after a purchase payment, 6% in the second year, 5% in the third year, and so on until the eighth year, when the surrender charge no longer applies Often, contracts will allow you to withdraw part of your account value each year – 10% or 15% of your account value, for example – without paying a surrender charge Example: You purchase a variable annuity contract with a $10,000 purchase payment The contract has a schedule of surrender charges, beginning with a 7% charge in the first year, and declining by 1% each year In addition, you are allowed to withdraw 10% of your contract value each year free of surrender charges In the first year, you decide to withdraw $5,000, or one-half of your contract value of $10,000 (assuming that your contract value has not increased or decreased because of investment performance) In this case, you could withdraw $1,000 (10% of contract value) free of surrender charges, but you would pay a surrender charge of 7%, or $280, on the other $4,000 withdrawn Mortality and expense risk charge – This charge is equal to a certain percentage of your account value, typically in the range of 1 This charge compensates the insurance company for insurance risks it assumes under the annuity contract Profit from the mortality and expense risk charge is sometimes used to pay the insurer's costs of selling the variable annuity, such as a commission paid to your financial professional for selling the variable annuity to you Example: Your variable annuity has a mortality and expense risk charge at an annual rate of 1 Your average account value during the year is $20,000, so you will pay $250 in mortality and expense risk charges that year Administrative fees – The insurer may deduct charges to cover record-keeping and other administrative expenses This may be charged as a flat account maintenance fee (perhaps $25 or $30 per year) or as a percentage of your account value (typically in the range of 0 Example: Your variable annuity charges administrative fees at an annual rate of 0 Your average account value during the year is $50,000 You will pay $75 in administrative fees Underlying Fund Expenses – You will also indirectly pay the fees and expenses imposed by the mutual funds that are the underlying investment options for your variable annuity Fees and Charges for Other Features – Special features offered by some variable annuities, such as a stepped-up death benefit, a guaranteed minimum income benefit, or long-term care insurance, often carry additional fees and charges Other charges, such as initial sales loads, or fees for transferring part of your account from one investment option to another, may also apply You should ask your financial professional to explain to you all charges that may apply You can also find a description of the charges in the prospectus for any variable annuity that you are considering tax code allows you to exchange an existing variable annuity contract for a new annuity contract without paying any tax on the income and investment gains in your current variable annuity account These tax-free exchanges, known as 1035 exchanges, can be useful if another annuity has features that you prefer, such as a larger death benefit, different annuity payout options, or a wider selection of investment choices You may, however, be required to pay surrender charges on the old annuity if you are still in the surrender charge period In addition, a new surrender charge period generally begins when you exchange into the new annuity This means that, for a significant number of years (as many as 10 years), you typically will have to pay a surrender charge (which can be as high as 9% of your purchase payments) if you withdraw funds from the new annuity Further, the new annuity may have higher annual fees and charges than the old annuity, which will reduce your returns If you are thinking about a 1035 exchange, you should compare both annuities carefully Unless you plan to hold the new annuity for a significant amount of time, you may be better off keeping the old annuity because the new annuity typically will impose a new surrender charge period Also, if you decide to do a 1035 exchange, you should talk to your financial professional or tax adviser to make sure the exchange will be tax-free If you surrender the old annuity for cash and then buy a new annuity, you will have to pay tax on the surrender Bonus Credits Some insurance companies are now offering variable annuity contracts with "bonus credit" features These contracts promise to add a bonus to your contract value based on a specified percentage (typically ranging from 1% to 5%) of purchase payments Example:  You purchase a variable annuity contract that offers a bonus credit of 3% on each purchase payment You make a purchase payment of $20,000 The insurance company issuing the contract adds a bonus of $600 to your account Variable annuities with bonus credits may carry a downside, however – higher expenses that can outweigh the benefit of the bonus credit offered Frequently, insurers will charge you for bonus credits in one or more of the following ways:Higher surrender charges – Surrender charges may be higher for a variable annuity that pays you a bonus credit than for a similar contract with no bonus credit Longer surrender periods – Your purchase payments may be subject to surrender charges for a longer period than they would be under a similar contract with no bonus credit Higher mortality and expense risk charges and other charges – Higher annual mortality and expense risk charges may be deducted for a variable annuity that pays you a bonus credit Although the difference may seem small, over time it can add up In addition, some contracts may impose a separate fee specifically to pay for the bonus credit Before purchasing a variable annuity with a bonus credit, ask yourself – and the financial professional who is trying to sell you the contract – whether the bonus is worth more to you than any increased charges you will pay for the bonus This may depend on a variety of factors, including the amount of the bonus credit and the increased charges, how long you hold your annuity contract, and the return on the underlying investments You also need to consider the other features of the annuity to determine whether it is a good investment for you Annuity A offers a bonus credit of 4% on your purchase payment, and deducts annual charges totaling 1 Annuity B has no bonus credit and deducts annual charges totaling 1 Let's assume that both annuities have an annual rate of return, prior to expenses, of 10% By the tenth year, your account value in Annuity A will have grown to $22,978 But your account value in Annuity B will have grown more, to $23,136, because Annuity B deducts lower annual charges, even though it does not offer a bonus You should also note that a bonus may only apply to your initial premium payment, or to premium payments you make within the first year of the annuity contract Further, under some annuity contracts the insurer will take back all bonus payments made to you within the prior year or some other specified period if you make a withdrawal, if a death benefit is paid to your beneficiaries upon your death, or in other circumstances If you already own a variable annuity and are thinking of exchanging it for a different annuity with a bonus feature, you should be careful Even if the surrender period on your current annuity contract has expired, a new surrender period generally will begin when you exchange that contract for a new one This means that, by exchanging your contract, you will forfeit your ability to withdraw money from your account without incurring substantial surrender charges And as described above, the schedule of surrender charges and other fees may be higher on the variable annuity with the bonus credit than they were on the annuity that you exchanged Example:  You currently hold a variable annuity with an account value of $20,000, which is no longer subject to surrender charges You exchange that annuity for a new variable annuity, which pays a 4% bonus credit and has a surrender charge period of eight years, with surrender charges beginning at 9% of purchase payments in the first year Your account value in this new variable annuity is now $20,800 During the first year you hold the new annuity, you decide to withdraw all of your account value because of an emergency situation Assuming that your account value has not increased or decreased because of investment performance, you will receive $20,800 minus 9% of your $20,000 purchase payment, or $19,000 This is $1,000 less than you would have received if you had stayed in the original variable annuity, where you were no longer subject to surrender charges In short:  Take a hard look at bonus credits In some cases, the "bonus" may not be in your best interest Ask Questions Before You Invest Financial professionals who sell variable annuities have a duty to advise you as to whether the product they are trying to sell is suitable to your particular investment needs Don't be afraid to ask them questions And write down their answers, so there won't be any confusion later as to what was said Variable annuity contracts typically have a "free look" period of ten or more days, during which you can terminate the contract without paying any surrender charges and get back your purchase payments (which may be adjusted to reflect charges and the performance of your investment) You can continue to ask questions in this period to make sure you understand your variable annuity before the "free look" period ends Before you decide to buy a variable annuity, consider the following questions:Will you use the variable annuity primarily to save for retirement or a similar long-term goal Are you investing in the variable annuity through a retirement plan or IRA (which would mean that you are not receiving any additional tax-deferral benefit from the variable annuity) Are you willing to take the risk that your account value may decrease if the underlying mutual fund investment options perform badly Do you understand the features of the variable annuity Do you understand all of the fees and expenses that the variable annuity charges Do you intend to remain in the variable annuity long enough to avoid paying any surrender charges if you have to withdraw money If a variable annuity offers a bonus credit, will the bonus outweigh any higher fees and charges that the product may charge Are there features of the variable annuity, such as long-term care insurance, that you could purchase more cheaply separately Have you consulted with a tax adviser and considered all the tax consequences of purchasing an annuity, including the effect of annuity payments on your tax status in retirement If you are exchanging one annuity for another one, do the benefits of the exchange outweigh the costs, such as any surrender charges you will have to pay if you withdraw your money before the end of the surrender charge period for the new annuity Remember:  Before purchasing a variable annuity, you owe it to yourself to learn as much as possible about how they work, the benefits they provide, and the charges you will pay Much of this information applies to variable annuities, as well Mutual Fund Investing: Look at More Than a Fund's Past Performance – Describes some of the factors you should consider in choosing a mutual fund Mutual Fund Cost Calculator – Allows you to compare the total costs of owning different mutual funds Ask Questions – Questions you should ask about all of your investments, the people who sell them to you, and what to do if you run into problems Check Out Brokers and Advisers – Describes how to get background information about your broker or investment adviser, including prior employment history and disciplinary actions What to Do – Describes how to handle a problem with your broker or investment adviser Other Web Sites That May Be HelpfulNASD — NASD is an independent self-regulatory organization charged with regulating the securities industry, including sellers of variable annuities The NASD has issued several investor alerts on the topic of variable annuities, and has also issued a release to its members giving guidance on how to present information on the impact of taxes upon investment returns in a variable annuity as compared to a non-specific taxable account If you have a complaint or problem about sales practices involving variable annuities, you should contact the District Office of NASD nearest you A list of NASD District Offices is available on NASD's web site National Association of Insurance Commissioners (NAIC) — The NAIC is the national organization of state insurance commissioners Variable annuities are regulated by state insurance commissions, as well as by the SEC The NAIC's web site contains an interactive map of the United States with links to the home pages of each state insurance commissioner You may contact your state insurance commissioner with questions or complaints about variable annuities Get guaranteed income for life with an Immediate Annuity Click Here For More Information Hyperlink Text
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