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Depending on the investment objectives of your portfolio, annuities can be a great compliment to your financial plan. Annuities typically provide investors with tax-deferred investment returns and a death benefit.

What is an Annuity?

An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a guaranteed minimum amount, such as your total purchase payments.

Fixed and Variable Annuities

There are generally two types of annuities – fixed and variable. In a fixed annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your account is growing. The insurance company also guarantees that the periodic payments will be a guaranteed amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse. Fixed annuities offer guaranteed returns and/or income for life which can create stability for the wealth distribution phase of one’s financial plan.

In a variable annuity, by contrast, you can choose to invest your purchase payments from among a range of different investment options. The rate of return on your purchase payments, and the amount of the periodic payments you will eventually receive, will vary depending on the performance of the investment options you have selected. The performance of variable annuities is tied to the securities held within the contract and the account value is subject to the fluctuations experienced by those corresponding securities.

Equity-Indexed Annuity

An equity-indexed annuity is a special type of annuity. During the accumulation period – when you make either a lump sum payment or a series of payments – the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum.

Please note:

  • The guarantees associated with an annuity are based on the claims-paying ability of the issuing insurance company.
  • Variable annuities are subject to various fees and charges including mortality and expense risk charges, administrative costs, and the investment management fees associated with the underlying investment options.
  • Fixed, equity-indexed annuities and variable annuities are generally subject to contingent deferred sales charges when an early withdrawal is made. In addition, some fixed or equity-indexed annuities can sometimes be subject to lengthy  surrender charge periods that can extend longer than 15 years.
  • Early withdrawals from annuities are subject to a 10% tax penalty when occurring prior to age 59 1/2 .

 

In addition to the above disclosures, it should also be clear with respect to equity-indexed annuities that these annuities are subject to a cap or limit on the earnings of the corresponding index to which the annuity is linked. Thus, an annuity owner does not receive the entire amount of gains or earnings from a particular index. Further, it should also be clear that it is possible to lose money in an equity-indexed annuity as most insurance companies only guarantee that the annuity owner will receive 90% of the total contributions to the annuity. Thus, if there are no earnings from the linked index and an early withdrawal is made, there is potential that less than the initial amount contributed to the annuity will be returned.

Source: Securities and Exchange Commission

Alamo Capital is licensed in California (Ins # 0B23582) and Nevada (Ins #638524)