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Delaware Department of Insurance

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Annuities


An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. Annuities are often bought for future retirement income. Only an annuity can pay an income that can be guaranteed to last as long as you live. Your money grows tax-deferred as long as you leave it in the annuity.


Tips

Some tips on purchasing annuities from the Insurance Commissioner's Office:

For seniors who are considering purchasing annuities, the first and most important tip is that in most cases, variable annuities are bad deals for senior citizens.  AARP has stated that "variable annuities are not for those already retired or near retirement.  Their purpose is for retirement savings to grow tax-deferred over an extended period of time."  In fact, some financial institutions, such as Citizens Bank, will no longer sell variable annuities to seniors.

If you are still interested in annuities, make sure that you understand all of the fees that are involved.  These fees can include surrender charges for early withdrawal of your funds, mortality and expense risk charges for those funds that offer guaranteed payouts, administrative fees for record-keeping and other overhead expenses, and charges for any special features that you may select.

Make sure that you understand the tax penalties that may be assessed - on top of any early surrender charges - against investors that withdraw before reaching the age of 60.  Make sure that you also understand the tax benefits that annuities offer—although their earnings accrue on a tax-deferred basis, they do not provide all the tax advantages of a 401(k) plan.

A proposal was made for a new regulation regarding the sales of annuities to seniors. Find out about it here.

10 Things To Know

Ten things you should know about buying fixed deferred annuities, from the National Association of Insurance Commissioners:

1. What is an Annuity?
An annuity is a contract in which an insurance company makes a series of income payments at regular intervals in return for a premium or premiums you have paid. Annuities are often bought for future retirement income. Only an annuity can pay an income that can be guaranteed to last as long as you live. Your money grows tax-deferred as long as you leave it in the annuity.

2. Examine Different Kinds of Annuities
The most common types of annuities are: single or multiple premiums, immediate or deferred and fixed or variable. For a single premium contract, you pay the insurance company only one payment, where as you make a series of payments for a multiple premium. With an immediate annuity, income payments start no later than one year after you pay the premium. The income payments from a deferred annuity often start many years later. Deferred annuities have an accumulation period, which is the time between when you start paying premiums and when income payments start. During the accumulation period of a fixed deferred annuity, your money, less any applicable charges, earns interest at rates set by the insurance company or in a way spelled out in the annuity contract. During the payout period, the amount of each income payment to you is generally set when the payments start and will not change. During the accumulation period of a variable annuity, the insurance company puts your premiums, less any applicable charges, into a separate account. You decide how the company will invest those premiums, depending on how much risk you want to take. During the payout period of a variable annuity, the amount of each income payment to you may be fixed (set at the beginning) or variable (changing with the value of the investments in the separate account.

3. Know How Interest Rates are Set
During the accumulation period, your money, less any applicable charges, earns interest at rates that change from time to time. Usually, what these rates will be is entirely up to the insurance company. The current rate is the rate the company decides to credit to your contract at a particular time. The company will guarantee it will not change rates for a certain time period. The minimum guaranteed interest rate is the lowest rate your annuity will earn. This rate is stated in the contract. Some annuity contracts apply different interest rates to each premium you pay or to premiums you pay during different time periods. Other annuity contracts may have two or more accumulated values that fund different benefit options. These accumulated values may use different interest rates. You get only one of the accumulated values depending on which benefit you choose.

4. Know What Charges May be Subtracted from Your Fixed Deferred Annuity
Most annuities have charges related to the cost of selling or servicing it. These charges may be subtracted directly from the contract value. Ask your agent or company to describe the charges that apply to your annuity. Some examples of charges, fees and taxes are surrender or withdrawal charges, free withdrawal, contract fee, transaction fee, percentage of premium charge and premium tax.

5. Contract Benefits of Fixed Deferred Annuities
Companies may offer various income payment options. You or another person that you name may choose the option. If you choose Life Only, the company pays income for your lifetime. Life Annuity with Period Certain pays income for as long as you live and guarantees to make payments for a set number of years even if you die. If you choose Joint and Survivor, the company pays income as long as either you or your beneficiary lives. In some annuity contracts, the company may pay a death benefit to your beneficiary if you die before the income payments start.

6. Tax Treatment of Annuities
Under current federal law, annuities receive special tax treatment. Income tax on annuities is deferred, which means you are not taxed on the interest your money earns while it stays in the annuity. Tax-deferred accumulation is not the same as tax-free accumulation. An advantage of tax deferral is that the tax bracket you are in when you receive annuity income payments may be lower than the one you are in during the accumulation period. You will also be earning interest on the amount you would have paid in taxes during the accumulation period. Most states’ tax laws on annuities follow the federal law. You should consult a professional tax advisor to discuss your individual tax situation.

7. Take Advantage of the "Free Look" Provision
Many states have laws that give you a set number of days to look at the annuity contract after you buy it. If you decide during that time that you do not want the annuity, you can return the contract and get all your money back. This is often referred to as a free look or right to return period. The free look period should be prominently stated in your contract. Be sure to read your contract carefully during the free look period.

8. Is a Fixed Deferred Annuity Right for You?
You should think about what your goals are for the money you may put into the annuity. You need to think about how much risk you are willing to take with the money as well. Ask yourself the following questions: How much retirement income will you need in addition to what you will get from Social Security and pension, will you need that additional income only for yourself or yourself and others, How long can you leave money in the annuity and does the annuity let you get money when you need it.

9. Some Questions Your Agent Should be Able to Answer
A few questions that you should ask your agent are: Is this a single premium or multiple premium contract, what is the initial interest rate and how long is it guaranteed, what is the guaranteed minimum interest rate, can I get a partial withdrawal without paying surrender or other charges and is there a death benefit.

10. Review Your Contract Carefully
Before you decide to buy an annuity, you should review the contract. Terms and conditions of each annuity contract will vary. Ask the agent and company for an explanation of anything you do not understand. Do this before any free look period ends. Compare information for similar contracts from several companies. Comparing products may help you make a better decision. If you have a specific question or cannot get answers you need from the agent or company, contact your state insurance department.

Questions To Ask

Questions to ask of anyone trying to sell you an annuity, from the National Association of Securities Dealers:

How long will my money be tied up?

Are there surrender charges or other penalties if I withdraw funds from the investment earlier than I anticipated?

Will you be paid a commission or any type of compensation for selling the variable annuity?  If so, how much?

What are the risks that my investment could decline in value?

What are all the fees and expenses? 

Also, be sure to ask yourself the following questions before buying an annuity:

Am I already contributing the maximum amount to my 401(k) plan and other tax-deferred retirement plans?

Do I have a long-term investment objective?  Am I going to need the money before the surrender period ends?

Do I understand how the variable annuity works, the benefits it provides, and charges I have to pay?

Have I read and understood the prospectus?

Are there special features provided such as long-term care insurance that I don't need?

If I am buying a variable annuity, have I shopped around and compared the features of various variable annuities such as sales loads and other fees and expenses?

Do I understand the effect annuity payments could have on my tax status?

If I'm considering purchasing a variable annuity within an IRA, do I understand that IRAs already provide for tax-deferred savings?

Am I being pressured into making a quick purchase?



Last Updated: Tuesday, 06-Jan-2009 13:51:37 EST
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