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Just as life insurance provides funds in the event of a sudden death, annuities can provide the insured with a guaranteed income stream they can never outlive.  Annuities also have many appealing properties to savers and investors alike.  Annuities enjoy taxdeferred growth on the accumulated returns or interest.  This can have a significant impact on the accumulation performance of annuities as compared to other savings and investment instruments.  They also avoid probate on wealth transfer to the beneficiaries.  The owner of an annuity simply names primary and contingent beneficiaries on an application.  When the annuitant passes, these funds are seamlessly dispersed to the beneficiaries according to the distribution flow of the owners of the annuity.  This makes annuities appealing for wealth transfer purposes.  Annuities also generally offer asset protection in most states across the nation.  We live in a litigious society where liability lawsuits are common.  In the state of Texas, annuities enjoy protection from lability claims, which makes them a favored retirement savings vehicle among many investors.  Many annuities offer principal protection from market losses and are guaranteed by the claims paying ability of the insurers who issue these contracts.  For more conservative investors, this feature offers peace of mind in retirement. 


Annuity Types: 


  • Fixed Annuities 

Fixed annuities are bond like in nature.  The issuing carrier will typically offer a declared interest rate and guarantee the principal and interest over a stated period of time.  Fixed annuities are normally issued in 3-, 5-, and 7-year terms.  This means the declared interest rate will be guaranteed over these periods of time.  Any partial or full surrender in excess of the guaranteed withdrawal amount over the stated period will incur a surrender charge.  At the end of the term, the owner of the annuity may freely withdraw the principal plus all the accumulated interest without penalty.  These guarantees offer many savors with peace of mind, knowing their retirement savings will incur no losses. 


  • Fixed Indexed Annuities 

A fixed-indexed annuity is like a fixed annuity except the underlying interest rate credited to the account balance, is linked to a specified equity index like the S&P 500 index.  Principal is guaranteed contractually by the carrier; however, the interest credited is not guaranteed and is based on the underlying performance of the stated index.  Indexed annuities are suitable for moderate to conservative investors looking to earn more returns than fixed annuities while still enjoying guarantees on the principal investment.  In exchange for these principal guarantees, insurance carriers will have caps, participation rates, or spreads associated with the returns to compensate for the added expense of linking returns with a stated index. 

  1. Caps – Caps limit the upside potential of a stated index.  For example: If the annuity has an 8% cap on the S&P 500 index, then regardless of the indexes’ return in a stated year, the maximum potential gain would be 8% 
  1. Participation rates– Par rates refer to the amount of capital that is participating in the return of the tracked index.  Participation rates vary from carrier to carrier.  We typically look for carriers that have relatively high participation rates with no caps.  These crediting methods usually perform best over long periods of time. 
  1. Spreads– A spread on the indexes’ return deducts a certain percentage from the top of the index return.  So, for example: If the S&P returns 15% in a stated year, and the spread is 2%, then the insurance carrier will credit the annuity owner with 13%.  Participation rates and spreads are more advantageous for the annuity owner over caps because the interest, in theory, is unlimited.   



  • Variable Annuities

Variable annuities are the final variation of the annuity model in which the underlying accumulation performance is directly invested in equity and debt instruments called sub accounts.  These sub accounts act like mutual fund investments which seek to diversify the underlying investments to control volatility and improve performance.  Unlike fixed and indexed annuities, Variable contracts do not guarantee the principal investment which makes them much more risky than other annuities with guarantees.  This exposure to volatile forces within the markets makes variable annuities expensive and costly from a fee standpoint.  According to Morning Star, variable annuity fees range from 2 to 4% on average.  These excessive fees have the unintended consequence of dragging down the performance over time.  Many contracts will guarantee an income stream for as long as the annuitant lives.  However, the underlying account value could diminish to 0, which could force the annuitant to remain locked in these types of low performing contracts for life.   


Of the 3 main types of annuities offered in the marketplace, we highly favor the indexed annuity model, because the returns have the potential for market rates of return without any downside risk to the principal found in the variable annuity model.  Moreover, the fixed indexed annuity model could potentially outperform the fixed interest annuity over extended periods of time assuming the market conditions are performed under historical standards.  Michael Steele is a CFP (Certified Financial Planner) with extensive experience in the life and annuity market for more than 20 years now.  He has sophisticated software that compares most annuities sold in the marketplace now and ranks them based on their performance and Internal rate of return.  For a no obligation consultation, call us Today!