ANNUITIES: AN INSURANCE PRODUCT THAT CAN GUARANTEE LIFE TIME INCOME

BY ALAN PLAFKER, PRESIDENT & CEO
MEMBER BROKERAGE SERVICE LLC
A MELROSE CREDIT UNION SERVICE ORGANIZATION

This article was first published in 2009. It has been updated for this current issue of TLC Magazine.

Retirement planning is one of the biggest challenges facing Americans today. With concerns over company pensions, Social Security, and a volatile stock market, annuities can be a great way to grow and supplement your retirement income every year.

In general, you buy an annuity with a lump sum or a series of payments. In return, your premium is paid back to you plus any earnings over a certain amount of time. Many annuities have a lifetime payout schedule; the longer you live, the more you receive. And with deferred annuities your money can grow tax deferred until your payout schedule begins.

There are several kinds of annuities. To get started, there are basically four main types to consider - fixed or variable and deferred or immediate.

Annuities can be structured according to a wide array of details and factors such as the duration of time that payments from the annuity can be guaranteed to continue. They can also be prearranged to provide fixed periodic payments to the annuitant or variable payments. Alternatively, annuities can be structured to pay out funds for a fixed amount of time such as 20 years, regardless of how long the annuitant lives.

A fixed annuity offers a guaranteed minimum interest rate or guaranteed income payment for a specific period of time. Fixed annuities are generally considered to be low risk and can guarantee retirement income that you can't outlive.

A variable annuity allows you to invest your purchase payment into a separate account which invests in underlying portfolios with varying potential for return. Your earnings will fluctuate over time, and depending on the performance of the investments you choose, your principal may be more or less than originally invested. This gives you the opportunity for higher potential return but at a higher risk.

A deferred annuity, which can be fixed or variable, means that your guaranteed payouts of income are delayed until you elect to receive them. Many fixed annuities offer maturities as far as 10 -20 years down the road which allows your money to grow based on the stated interest rate over the years before your payout schedule begins.

An immediate annuity, which can also be fixed or variable, allows you to turn a one time, lump sum payment into a guaranteed series of payouts that generally begin within a year of the annuity issue date.

Types of Fixed Annuities

The two main types of fixed annuities are life annuities and term certain annuities. Life annuities pay a predetermined amount each period until the death of the annuitant, and term certain annuities pay a predetermined amount each period (usually monthly) until the annuity product expires which may very well be before the death of the annuitant.

Deferred annuities have two phases:

• savings and investment, where your earnings accumulate tax deferred and you generally have access to your money
  
  
  
• income, where you convert your account balance into a guaranteed stream of income (annualize) that you can live on the rest of your life; any remaining assets can be invested to grow your overall portfolio
  

Types of deferred annuities:

• Deferred fixed annuity, which gives you a steady, fixed return on your money.
  
  
  
• Deferred variable annuity, which gives you investment flexibility and potential growth.
  

What is the difference between a fixed deferred annuity and a variable deferred annuity?

• Fixed annuities generally offer lower risk and lower growth potential while variable annuities can offer greater growth potential in return for increased risk.
  
  
  
• Variable annuities offer more growth potential in return for a higher level of risk.
  

Immediate Annuity

With an immediate annuity (or income annuity) you generally pay the insurer a single amount in exchange for payments that begin immediately (within 12 months). Payments must be no less frequent than annually. Payments continue for your entire lifetime, or for some other duration offered by the insurer such as the joint life times of yourself and another person, or a specified number of years. Depending on the option you choose there may also be a death benefit where payments may continue to your beneficiary for some time after you die. Immediate annuities can be either fixed with generally unchanging payments, or variable, where payment amounts will vary based on the performance of underlying investments.

Annuities offer different ways a unique investment product can be structured to provide alternatives to individuals seeking the flexibility to construct an income contract that will best meet their needs. Annuities have helped millions of people prepare for retirement, but because there are different types with different purposes they can be a bit confusing. Keep in mind that annuities generally fall into two distinct categories: tax deferred and income.

Which annuity is best for you? The answer depends on your individual circumstances. Do you have money to invest as a result of an inheritance, a pension plan or the sale of a home or business? Do you have a bank CD or money market account that is no longer generating competitive yields? Do you have more money available now that your children are grown?

Many people today use annuities as part of their overall financial plan instead of savings accounts and certificates of deposit because their tax deferred money can grow and compound faster over a shorter period of time. "Tax deferred" means that the earnings are not taxed until distributed either in a withdrawal or in annuity payments. Even then, the amount you contribute to the policy is not taxable.

To make the most informed decision possible when planning your personal finances contact your CFP (Certified Financial Planner) today. He, she can provide you with a constructive and personalized professional answer to your financial questions. With their help you can make the right decision and ultimately achieve that protection for your nest egg and your future.

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Alan Plafker is President of Member Brokerage Service LLC, a Melrose Credit Union Service Organization. He is a licensed Insurance Broker and serves as Treasurer on the Board of Directors the PIANY (Professional Insurance Agents Association of NY), serves on the Board of CIBGNY (Council of Insurance Brokers of Greater NY), and was appointed to the New York Independent Livery Driver Benefit Fund Board of Directors. His Agency insures thousands of polices for TLC Insurance as well as many policies for all types of insurance. You can reach him in his Briarwood, Queens office at (718) 523-1300 ext. 1082, or visit the website at: www.MemberBrokerage.com.