Annuities

Definition

Typically created by life insurance companies

Provides a series of payments Must be funded by the investor

Accumulation period

Money IN Can be done in one lump sum (single

premium) Can be done over time (installment contract)

Distribution period

Money OUT Multiple options

Distributions

Life annuity (no refund): results in higher monthly payments

Guaranteed minimum annuity: life annuity period certain, refund annuity

Annuity certain: Set period of time, set amount

Distributions (cont.)

Temporary life annuity: specified time period ONLY if you live

Immediate annuity: starts now Deferred annuity: just like it sounds

Rates of return

Fixed rate annuity: guaranteed rate of interest, no loss of principal Low rates (money market) Company can pay whatever rate they want

Rates of return (cont.)

Variable annuity Amount paid depends on investment results Self-directed investments Can have a very limited selection of investments Possible to LOSE ground

Benefits of Annuities

Source of income that cannot be outlived (if you structure it right)

Tax-sheltered investment (tax-deferred)

The down-side

Fees: Management fees (1-2%) Insurance fees (1%) Contract charges (around $50 / year) Early withdrawal penalty fees charged by

COMPANY (Surrender fees of 5-10%) Early withdrawal penalty of 10% charged by IRS

Down-side (cont.)

Returns: Typically awful…but shop around Bait and Switch: High rates advertised, which

drop after several years.

Common Sense on Annuities

Shop around: Compare:

FeesPerformanceManagement

Insurance company rating matters:Moody’sS&P