A Brief Guide To Annuities

A BRIEF GUIDE TO ANNUITIES

An annuity contract is an agreement between you and an insurance company. You agree to make one or more payments—premiums—to the insurer, who in turn agrees to invest your deposits and provide you with a stream of income—annuity distributions—at a specified time. Because an annuity is an insurance contract, any interest or investment return your deposits earn is tax deferred until withdrawn.

Premium Structure
A single premium annuity accepts only one payment. A flexible premium annuity allows you to make a series of payments over the life of the contract and the payments do not have to be made in accordance with a fixed schedule. Most companies set minimum premium amounts. Under a flexible premium annuity, there is usually one minimum for the first payment and another, lower minimum for subsequent payments.

Distribution Schedule
An immediate annuity is a single premium annuity that begins making periodic payments within the first year of the contract. Immediate annuities are often purchased by retirees who have received a large lump sum payment from a retirement plan and want the security of a regular income without the responsibility of managing an investment portfolio. Companies offer a variety of distributions options. You can, for example, select an annuity that will stop making payments when you die or one that will continuepayments through the lifetime of your surviving spouse or other beneficiary.

A deferred annuity consists of two phases: an accumulation period during which premiums are invested and grow tax-deferred, and a payout period during which distributions are made. You can elect to take a single sum distribution, receive payments over time or convert your deferred annuity into an immediate annuity. Earnings withdrawn from an annuity are subject to taxes and penalties may be applicable to any amounts you withdraw before age 59 1/2. In addition, many deferred annuities levy surrender charges on withdrawals made before the contract has been in force for a specified period of time.

Fixed or Variable Earnings
When used in connection with annuity contracts, the terms fixed and variable refer to the earnings on your invested premiums.

Under a fixed annuity, interest is credited at the greater of a contractually guaranteed minimum rate and a variable rate that is periodically recalculated in accordance with the terms of the contract. Before purchasing a fixed annuity, you should understand how often variable rates will be reset and the formula and/or benchmark that will be used.

A variable annuity gives you a greater degree of control over how your premiums are invested and offers the potential for greater returns. Variable annuities offer a range of investment sub-accounts that are similar to mutual funds in that they invest in a professionally managed, diversified portfolio of stocks, bonds or other investment instruments in accordance with the sub-account’s stated goals and investment guidelines. The rate of return you earn in each sub-account fluctuates with the earnings of the underlying securities. You allocate your premiums to one or more sub-accounts in accordance with your objectives, time horizon and risk parameters. You can change how new premiums are allocated at any time and even transfer money from one sub-account into another. The advantage of a variable annuity is the high degree of investment flexibility and the potential for increased returns. The downside is that the values in the investment accounts will fluctuate due to market conditions and, when redeemed, may be worth more or less than your original payments.