Are they right for me?

The ideal annuity buyer is someone making the maximum contributions to other retirement plans, who can live without the money until after age 59½, and who is in at least the 25% tax bracket to take advantage of the tax deferral. You also might be a good candidate if you're concerned about outliving your savings because annuities can provide a guaranteed stream of income in retirement.

You shouldn't even consider investing in an annuity unless you are already contributing the maximum to other retirement plans, such as an IRA or 401(k). That's because those plans provide the same tax deferral as annuities but without as many fees. If you invest in an annuity inside a tax-advantaged account, you get no extra tax benefit.

Are they right for me?

The ideal annuity buyer is someone making the maximum contributions to other retirement plans, who can live without the money until after age 59½, and who is in at least the 25% tax bracket to take advantage of the tax deferral. You also might be a good candidate if you're concerned about outliving your savings because annuities can provide a guaranteed stream of income in retirement.

You shouldn't even consider investing in an annuity unless you are already contributing the maximum to other retirement plans, such as an IRA or 401(k). That's because those plans provide the same tax deferral as annuities but without as many fees. If you invest in an annuity inside a tax-advantaged account, you get no extra tax benefit.

Annuity Basics

An annuity is a contract issued by a life insurance company that provides for tax deferral of investment income until withdrawn from the contract. An annuity can also be referred to as a contract or agreement by which one receives fixed payments on an investment for a lifetime or for a specified number of years.

Fixed Annuities

Fixed annuities are an investment vehicle offered by insurance companies that guarantee a stream of fixed payments over the life of the annuity. The insurer, not the insured, takes the investment risk. Fixed annuities are sometimes called a fixed dollar annuity.

Split Annuities

Income and Capital Preservation
A Split Annuity is not an annuity policy but a combination of two annuity products. A single premium immediate annuity and a single premium tax deferred annuity. These two annuities are structured in such away as to produce immediate income for a guaranteed period of time and to restore your original principal at the end of that time period.

Administration
A Single Premium Annuity is used to restore the original principal at the end of the guaranteed period. The Single Premium Immediate Annuity provides a guaranteed monthly income for the same time period.

Advantages of a Split Annuity
One advantage of a split annuity is that your original principal is restored at the end of the guaranteed period. This allows you to start the process over again at prevailing interest rates. The funds placed in the Single Premium Deferred Annuity policy are available for emergencies with limitations.

Plan Limitations
The limits place on the use a split annuity are the issues ages of the policies, usually age 0-85 for non-qualified funds and 0-70 for qualified funds. The immediate income periods range from 3 to 20 years.

CD Annuities

These are fixed-rate annuities, but the guaranteed rate matches the penalty period. In other words, if you buy a five-year CD-type annuity at 4 percent, you're guaranteed to get 4 percent annually if you hold the CD for five years. One problem with this is that, if rates rise, you're locked in at a lower rate.

The CD-type annuity was developed to solve the problem of insurers making empty promises to continue paying a high interest rate after the guaranteed period. Rates were falling and customers weren't getting what they expected, so they paid a penalty to get out of the investment.

Typically, CD-type annuities offer a higher interest rate than non-annuity CDs. They are a tax-deferred investment, but if you cash your five-year CD before age 59½, you'll pay the IRS a 10-percent penalty on the gain. However, many contracts allow customers to take out up to 10 percent of the balance or up to 100 percent of the interest annually without insurance company penalties.

Surrender charges on a CD-type annuity are similar to a typical fixed-rate annuity, and there is no FDIC coverage on these investments. Some CD-type annuities have an escape hatch. The insurance company penalty will be waived if the customer allows the insurance company to pay them over a five-year period or longer.

Immediate Annuities

An immediate annuity is an annuity which is purchased with a single payment and which begins to pay out right away. When you purchase an immediate annuity, it is generally with a single lump sum, and your income payments begin within 12 months of the date of purchase. With fixed immediate annuities, your payment from the annuity is based on a fixed interest rate. With variable immediate annuities, your payment is based on the value of the underlying investment, usually a stock portfolio.

After choosing an immediate annuity the annuity owner determines the schedule of payments. This can be done either monthly, quarterly, semiannually or annually. Another important decision to make with your immediate annuity is how long the payments will last. The annuity owner can choose to receive payments for a specified period of time, an entire lifetime or even for the life of a beneficiary.