Annuities & Senior Citizens

An annuity is an insurance contract sold by insurance companies. The insurer provides for either a single income payment or a series of income payments at regular intervals in exchange for a single premium (contribution) or multiple premiums (contributions) paid by the annuitant. Annuity contributions earn interest that can grow tax-deferred in the accumulation phase and can provide income for life in the income payment phase. These characteristics make annuities a popular choice among retirement income vehicles.

A variable annuity is an annuity contract that allows the policy owner to allocate contributions into various subaccounts of a separate account based upon the risk appetite of the annuitant. In contrast to fixed annuities, policyholders assume all of the investment risk with variable annuities because they are separate account products that are valued at market every day. Additionally, variable annuities are registered as securities with the Securities and Exchange Commission (SEC).

There are several types of annuities, all of which carry varying levels of risk and guarantees. To get the most out of an annuity, it is imperative that you know the different options available to you, as well as the benefits each type provides. Insurers sell a variety of annuity products that differ in how they accumulate funds, get annuitized, and provide guarantees. Annuity contributions can be made as a one-time large lump sum payment or through a series of flexible contributions that can differ by amount and timing, depending on the insurance contract. Single contribution policies are useful when the annuitant has a large lump sum of money, such as with an inheritance or lump sum retirement plan payout. Alternatively, flexible contribution policies are most suitable to consumers who need to accumulate retirement funds over time.

Annuities can be classified as either immediate or deferred.

• Immediate annuities are purchased with a one-time contribution and provide income payments to the annuitant within one year of purchasing the contract.
• Deferred annuities are purchased with either a single contribution or flexible contributions over time and provide income payments to the annuitant that begins at some future date.

Annuities can also be classified as fixed, variable, or indexed.

• Fixed annuity contracts guarantee a minimum credited interest. For immediate fixed annuity contracts, annuitants receive a fixed income stream based, in part, on the interest rate guarantee at the time of purchase. For fixed deferred annuity contracts, the insurer credits a fixed interest rate to contributions in the accumulation phase and pays a fixed income payment in the annuitization phase.
• Variable annuity contracts allow the policy owner to allocate contributions into various subaccounts of a separate account based upon the risk appetite of the annuitant. The contributions can be invested in stocks, bonds or other investments. Income payments in the annuitization phase can be fixed or fluctuate with the investment performance of the underlying subaccounts of the separate account. In contrast to fixed annuities' guaranteed interest provision, policyholders assume the investment risk with variable annuities because they are separate account products that are valued at market every day.
• Indexed annuity contracts have both fixed and variable features. Under these policies, interest credits are linked to an external index of investments, such as bonds or the S&P 500, but contain a minimum guaranteed interest rate. Other recent market additions include the expansion of various product guarantees. These guarantees can ensure the policyholder receives minimum death benefits, guaranteed living benefits, accumulation benefits, minimum credited interest rates, and income benefit or withdrawal benefit amounts.

To find out if an annuity is right for you, think about what your financial goals are for the future. Analyze the amount of money you are willing to invest in an annuity, as well as how much of a monetary risk you are willing to take. You shouldn't buy an annuity to reach short-term financial goals. When determining whether an annuity would benefit you, ask yourself the following questions:

• How much retirement income will I need in addition to what I will get from Social Security and my pension plan?
• Will I need supplementary income for others in addition to myself?
• How long do I plan on leaving money in the annuity?
• When do I plan on needing income payments?
• Will the annuity allow me to gain access to the money when I need it?
• Do I want a fixed annuity with a guaranteed interest rate and little or no risk of losing the principal?
• Do I want a variable annuity with the potential for higher earnings that aren't guaranteed and the possibility that I may risk losing principal?
• Or, am I somewhere in between and willing to take some risks with an equity-indexed annuity?

 
Understand the Product You are Buying

• Always review the contract before you decide to buy an annuity. Terms and conditions of each annuity contract will vary.
• You should understand the long-term nature of your purchase. Be sure you plan to keep an annuity long enough so the charges don't take too much of the money you invest.
• Compare information for similar contracts from several companies. Comparing products may help you make a better decision.
• Ask your agent and/or the company for an explanation of anything you don't understand. Do this before any free look period ends. The free look period gives you a set number of days to review the policy after you buy it. If you are not satisfied for any reason, you may return the contract and get your money back.
• Verify that the company and agent are licensed. In order to sell insurance in your state, companies and agents must be licensed. To confirm the credibility of a company or agent, contact the Department of Insurance. We can also provide you with the company's AM Best rating.

Questions You Should Ask your Agent or the Company

General Annuity Questions

• What is the guaranteed minimum interest rate?
• What charges, if any, are deducted from my premium & when?
• What charges, if any, are deducted from my contract value & when?
• What are the surrender charges or penalties if I want to end my contract early and take out all of my money?
• How many years will surrender charges apply?
• Can I get a partial withdrawal without paying charges or losing interest? Does my contract have vesting?
• Does my annuity waive withdrawal charges if I am confined to a nursing home or diagnosed with a terminal illness?
• What annuity income payment options do I have and when?
• What is the death benefit?
• What are the risks that my annuity/earned interest could decline in value?
• Is interest compounded during the term of the policy?
• What is the agent's commission on this product?

Additional Questions to Ask for Equity-Indexed Annuities

• What is the participation rate?
• For how long is the participation rate guaranteed?
• Is there a minimum participation rate?
• Does my contract have a cap?
• Is averaging used? How does it work?
• Is there a margin, spread, or administrative fee? Is that in addition to or instead of a participation rate?
• Which indexing method is used in my contract?
• What is the minimum interest the contract can earn?
• What is the maximum (cap) interest the contract can earn?

Suitability

Suitability regulations, 50 IAC 909 and 50 IAC 3120, require the insurance producer and insurance company to comply with the National Association of Securities Dealers Conduct Rules. Those rules require an insurance producer or insurance company, when selling an annuity insurance policy, to make reasonable efforts to obtain information concerning:

• the customer's financial status;
• the customer's tax status;
• the customer's investment objectives; and
• such other information used or considered to be reasonable by the insurance producer or insurance company in making recommendations to the customer.

The regulations do not set specific suitability criteria which must be met prior to selling a variable life policy or an annuity insurance policy to an individual. For example, the regulations do not prohibit the selling of a product to an individual who has attained a certain age or whose assets do not meet a certain threshold.