An annuity is a contract between an insurance company and the individual purchasing the annuity (the owner). The contract is fairly simple: in return for a sum of money (the premium), the insurance company makes guarantees to the purchaser. Examples of the guarantees that the insurance company may offer the tax-deferred annuity purchaser are:
- a guaranteed interest rate for a guaranteed period of time,
- a guarantee that the investor will receive at least as much as he/she invested under any circumstance (guaranteed return of principal), and
- a guarantee that the investor will never receive less than a minimum interest rate while the money is invested with the insurance company (regardless of how low interest rates go).
Many features of annuities are determined by insurance law and will tend to be the same from one contract to the next. Other contract features will be determined at the discretion of the insurance company offering the product and so may differ from one annuity to another.
UVEST offers a range of annuities from a variety of carefully selected product providers. Talk with your UVEST financial consultant to determine if an annuity is the right investment for you.
History of Annuities
Annuities were developed in Scotland in the early 1800s and made their way to America late in the century. Annuities were originally developed to provide a method for distributing the proceeds from life insurance policies.
The early annuities were, quite simply, a stream of equal payments spread over the lifetime of the recipient. The feature that made annuities unique was that the payments could be guaranteed for as long as the recipient lived; no other investment could do that.
Consider this example of the usage of an annuity: if a spouse died and left a life insurance settlement to provide for his or her spouse, an annuity could be used to guarantee that the income would be available for the remainder of the spouse’s life, regardless of how long he/she lived. Even today, annuities are the only investment available that can guarantee a lifetime income.
Annuities in Everyday Life
Annuities are all around us, although their existence may not be immediately obvious. When prizes are awarded for state lottery drawings, such as a $1 million prize paid over 20 years, the payment vehicle is an annuity. The state lottery commission makes a single payment to an insurance company in return for the insurance company making ongoing annuity payments.
When people retire and begin receiving their pensions, corporations purchase annuities to fund the pension payments. When large court settlements are awarded, such as to a child who was severely injured in an accident, the awards are usually made as annuities (referred to as structured settlements). As you can see, annuities are already in widespread use and have been for many years.
Tax-deferred Annuities
A tax-deferred annuity is a non-negotiable interest-bearing contract offered by an insurance company. Tax-deferred annuities have two distinct phases: the accumulation phase and the payout phase (also called annuitization).
During the accumulation phase, interest earnings are retained in the account so that the account balance grows. During the payout or annuitization phase, proceeds from the account are paid-out or distributed in one of many ways.
Types of Annuities
Annuities can be categorized in three ways:
- When income is paid (immediate or deferred annuity)
- Whether additional investments can be made to the same contract (single premium or flexible premium)
- How the money is invested (fixed or variable annuity)
You should note that all annuities combine these features in some manner.
Immediate Annuities vs. Deferred Annuities
One distinguishing characteristic of an annuity is the time that annuity payments start. An immediate annuity begins payments from one up to three months after it is purchased. Most payments are made monthly, but many insurers also allow quarterly, semiannual, or annual payments. Immediate annuities are most appropriate for individuals who are in immediate need of a stream of regular income. A deferred annuity delays payments until some point in the future. The accumulation period is the time during which the annuity grows in value.
Single-Premium Annuities vs. Flexible-Premium Annuities
A second distinction is the type of premium payment. A single-premium annuity is purchased with one lump-sum payment. There are no subsequent premium payments. Immediate annuities must be purchased in this way. A flexible-premium annuity is purchased through an initial minimum payment, after which additional payments of a certain minimum amount may be made at the option of the contract holder. This premium payment plan is attractive to investors who want to gradually accumulate increasing value in an annuity.
Fixed Annuities vs. Variable Annuities
A third distinction involves how the annuity grows in value. A fixed annuity guarantees a minimum fixed rate of return. A fixed annuity also may guarantee a higher rate of return for a certain period. At the expiration of that period, the contract may guarantee a different rate of return for another certain period. Fixed annuities are guaranteed contracts; the insurance company guarantees that it will fulfill its obligations to the annuity owners. This guarantee is backed by the full faith and credit of the insurance company offering the annuity (there is no government guarantee associated with annuities, i.e., FDIC).
In contrast, with a variable annuity, investors can choose to invest their purchase payments from a range of different investment options, typically mutual funds. The rate of return and the amount of the periodic payments investors eventually receive varies depending on the performance of the investment options selected. Unlike fixed annuities, variable annuities are securities and are regulated by the SEC.
You should consider a variable annuity’s risks, charges, and expenses carefully before investing. Contact your Financial Advisor to request a prospectus, which contains this and other information about a specific variable annuity. Read it carefully before you invest.
Past performance is no guarantee of future results. Investment return and principal value of a variable annuity will fluctuate, causing shares, when redeemed, to be worth more or less than their original cost. Annuity withdrawals made prior to age 59 1/2 may result in an IRS penalty.
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| Not FDIC Insured |
Not Bank Guaranteed |
May Lose Value |
| Not Guaranteed by any Government Agency |
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Securities and Insurance products are provided by UVEST Financial Services, Member FINRA, SIPC and a SEC Registered Investment Advisor. UVEST and Citizens Wealth Management are independent entities.
