By understanding how annuities work and the benefits such as tax-deferred growth and lifetime income you can make informed decisions.
The term annuity seems to have many different reactions and responses depending on what people have read or heard. However, at its most basic level, an annuity is a financial contract between an insurance company and someone or something. The contract is an agreement to pay premiums in exchange for the insurance company providing a future income stream. This is either through withdrawals, annuitization or defined by a rider. Annuities are often used for a retirement strategy due to their long-term nature. In this article, we will take a deeper dive into what is an annuity:
Who Can Set-up an Annuity?
An annuity policy is comprised of an owner, annuitant, and beneficiary. The owner is the person responsible for making decisions about the policy and paying the premium. An owner of an annuity is typically an individual but could also be a retirement plan, trust, charity, or organization.
What about the annuitant and beneficiary?
The annuitant is the person whose life is measured by the insurance company. The death of the annuitant triggers a death benefit, and their age is used to calculate income payments. The annuitant could be the same as the owner or different.
The beneficiary is a person who will receive a death benefit payout, if there is an account value, when the owner/annuity passes away.
How does an annuity grow?
There are numerous types of annuities; fixed, variable, and fixed indexed. All of these annuities offer the same contract structure but vary on how the premium grows. Let’s look at how these three types of annuities grow,
For every type of annuity, the account growth is tax-deferred; meaning taxes are not paid until the money is withdrawn from the annuity.
What if I need to access my money?
Annuities have a gradually decreasing percentage of withdrawal charges, that will be incurred if money is withdrawn from the policy (including total surrender). Annuities can have varying withdrawal schedules. However, most annuities offer the ability to take 10% free withdrawals every contract anniversary.
As annuities are designed to be a long-term solution designed for retirement, withdrawals prior to 59 ½ could be subject to the 10% IRS early withdrawal penalty.
In summary, annuities can be a valuable tool in a comprehensive retirement strategy. By understanding how annuities work and the benefits such as tax-deferred growth and lifetime income you can make informed decisions.
Within 403(b) and 457(b) retirement plans, National Life offers
Flex Secure Growth–for individuals who want to start building retirement savings without risk or fees.
Flex Secure Growth Bonus–for individuals who want to boost my savings with premium bonuses.
Flex Select Income–for individuals who want to build savings that can provide guaranteed lifetime income.
For more information, contact your local Agent or National Life Group.
“Standard & Poor’s®”, “S&P®”, “S&P 500®”, and “Standard & Poor’s 500™” are trademarks of Standard & Poor’s and have been licensed for use by National Life Insurance Company and Life Insurance Company of the Southwest. This Product is not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representations regarding the advisability of investing in the Product. The S&P Composite Index of 500 stocks (S&P 500®) is a group of unmanaged securities widely regarded by investors to be representative of large company stocks in general. An investment cannot be made directly into an index.
A Fixed Indexed Annuity (FIA) is usually a fixed annuity whose interest is determined, at least in part, by the performance of a specified index of the market. Unlike traditional fixed annuities, the policy owner may receive zero interest for a single period on a specific premium payment if the index performs poorly. However, with most designs, the premiums are protected and guaranteed to grow over time, and the owner of a fixed indexed annuity may experience better interest crediting than a traditional fixed annuity during periods when the market performs well.The guarantees of annuity contracts are contingent on the claims-paying ability of the issuing insurance company. All withdrawals made from annuities with pre-tax contributions are taxed as ordinary income. All withdrawals from an annuity purchased with non-qualified monies are taxable as ordinary income only to the extent there is a gain in the policy. Buying an annuity within a tax-deferred retirement plan does not offer extra tax benefits. If considering an annuity within a retirement plan, base your purchase decision on the annuity’s other features and benefits, as well as its risks and costs, not its tax benefits. Riders are supplemental benefits that can be added to an annuity. Riders may be optional, may require additional premium and may not be available in all states or on all products.This is not a solicitation of any specific annuity contract.
TC8028766(0625)3
