Annuity primer
An annuity is a tax-deferred insurance investment designed to help clients grow and protect assets while also providing income that can last a lifetime. A client can purchase an annuity with a lump sum or series of payments. Depending on the type of annuity, the premium may be protected and the annuity assets have the ability to grow without paying current income tax. Additionally, there are no contribution limits for those who may have already maxed out other tax-deferred accounts.
An annuity contract is broken down into two phases:
Accumulation phase— This phase starts when the contract is issued and the initial investment is made. During this phase, the invested assets can grow tax-deferred in the annuity. Depending on the type of annuity, growth can be based on interest rates, tied to stock market performance, or invested directly in the markets. Certain types of annuities provide protection of premium while others can fluctuate with market performance. The accumulation phase continues until the contract is annuitized or withdrawals begin.
Distribution phase – This phase begins when the contract owner decides to begin taking income payments from the annuity. This can be done through annuitization—when the contract value is converted to a steady stream of income payments—or through withdrawals.
There are several types of annuities that can be tailored to meet a client’s unique needs:
Fixed Annuities
- Premium is protected
- Tax-deferred growth potential
- Guaranteed minimum interest rate
- Guaranteed income for life or for a set number of years
Fixed Indexed Annuities
- Premium is protected
- Tax-deferred growth potential
- Minimum guaranteed interest rate plus interest that is tied to the stock market
- Guaranteed income for life or for a set number of years
Structured Annuities
- Partial premium protection
- Tax-deferred growth potential
- Returns linked to the stock market with greater growth potential than an FIA
- Guaranteed income for life or for a set number of years
Variable Annuities
- No premium protection
- Tax-deferred growth potential
- Returns are based on the underlying investment with the potential for unlimited growth or loss
- Guaranteed income for life or for a set number of years
Optional income and death benefits
Many annuity contracts offer optional income and death benefits for an additional cost:
- Income benefits – The most common type is a Minimum Guaranteed Withdrawal Benefit (MGWB) which gives the client guaranteed lifetime income based on high water marks within the contract. An MGWB maximizes the amount of guaranteed income for the client.
- Death benefits – Allow the client to maximize their legacy.
Fees
Annuity fees may differ based on the type of annuity, but here are the main fees you can expect:
- Administrative Fees
- Cost to manage the contract
- Can be a percentage of contract value or a flat fee
- Surrender Charges
- Most annuity contracts ask the client to keep their money invested for a certain number of years before withdrawing
- For withdrawals that are taken during the surrender period, there is a charge based on the number of years held
- Sample surrender schedule:
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
| Charge | 7% | 6% | 5% | 4% | 3% | 1% | 0% |
- Mortality Expenses
- Cover the risk the insurance company takes by issuing the contract
- Typically range from 0.5% – 1.5% annually
- Investment Fees
- Fees for the management of the underlying investments in the annuity
- Typically range from 0.6% – 3% annually
- Rider Charges
- Some annuities offer optional riders that provide additional benefits to the client
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