Annuities can be complicated. Our free and quick video series makes them easy to understand. Learn how an FIA fits into your retirement plan. Or enroll in the interactive online course with virtual quizzes on our consumer-friendly education center.
An annuity is an insurance product that helps turn your assets into income. It's designed to help convert your savings into a stream of income, helping to make your financial plans during retirement more predictable.
A fixed indexed annuity is a tax deferred accumulation product offered by an insurance company. It provides principal protection in a down market and still gives the owner an opportunity to earn interest on their contract value when the market goes up.
Can you change your mind about purchasing an annuity and get a refund? During the free look period, you can change your mind without penalty. Depending on the state in which you live, you will generally have between 10 and 45 days.
Contract value is the value of your annuity contract at a specific point in time. When an annuity contract is issued, the contract value will equal your premium. Some contracts may include a premium bonus, which may increase your contract value at issue, or over a certain number of years.
In exchange for providing downside protection on indexed accounts, an insurance carrier limits some of the upside potential, should the market grow. Generally, insurance companies limit growth through three levers, cap rates, participation rates, or spreads. A strategy fee may also apply. Let's take a look at each of these terms.
Life is full of surprises, and you may need or want to access the money in your account earlier than expected. You can withdraw money from your annuity at any time. It's important to note however, that withdrawing money from your annuity before the surrender charge period ends may result in surrender charges, a negative or positive market value adjustment or MVA, pro-rated fees, and less interest credited to your contract.
Surrender charges are assessed if you choose to take a withdrawal in excess of any free withdrawal amount provided by your contract. The free withdrawal amount is generally an amount you may withdraw from your annuity contract each year without incurring any charges or adjustments. Surrender charges are typically expressed as a percentage of your premium of core contract value withdrawn.
Many annuity contracts contain an adjustment for changes in market conditions that applies when you withdraw money. A market value adjustment, or MVA, is an increase or decrease in the amount of money you receive when you take a withdrawal in excess of the free withdrawal amount or fully surrender your contract.
Insurance carriers have a number of different provisions that allow for withdrawal without penalty. You should read your provisions in your contract to be certain of the specific circumstances. Common options to withdraw without penalty include any amount permitted under the annual free-withdrawal amount benefit, a required minimum distribution requested after the first calendar year, income benefits provided by lifetime income rider, and by annuitizing your contract.
Upon reaching the age of 70 1/2 the IRS requires that you withdraw at least a minimum amount each year from your IRAs and retirement plans except for Roth IRAs, and that you pay ordinary income taxes on the taxable portion of your withdrawal.
Annuities offer three different methods for converting the contract value into income. They are traditional annuitization, automatic withdrawals, and the election of guaranteed income riders. All annuities can be annuitized, meaning they can be converted into periodic income payments.
The amount of income you receive depends on the specific terms of any annuitization benefit or guaranteed income rider. If you choose to annuitize the contract, the income is generally calculated based on the age and sex of the annuitant or annuitants and the particular payment option you select. Payment options may include income for a specified period of time, income for life, or a combination of both.
Your benefit base is the value used to determine the amount of income provided by guaranteed income rider. The benefit base is used solely for the determination of income, and is not available for withdrawal. Your benefit base is equal to your premium at the time your annuity contract is issued.
In general, you choose the date the guaranteed lifetime income payments provided by your guaranteed income rider begin. This is known as exercising your rider. Once you have exercised your rider, you may choose to take automatic withdrawals of the income payments provided by your rider.
With a fixed-indexed annuity, you determine who receives the death benefit by designating beneficiaries when you purchase the contract. That person or persons, who could be a spouse, child, or other loved one, will be able to receive benefits after you die.
Some annuities allow your spouse to continue the contract as the new owner instead of receiving the death benefit as long as they are your beneficiary. The internal revenue code has distribution at death requirements that may affect the terms of the contract upon spousal continuation.
Important Disclosures
The videos shown as a part of this series are for general information purposes only. The features and applicable conditions discussed in the above videos and attached glossary may vary by specific product offering. Completion of the informational series and accompanying questionnaires does not certify that an individual has completed all necessary requirements to make a suitable purchasing decision. Additional information beyond what is provided in the video series contained herein may be required. Please consult with a financial professional for additional information before making a purchasing decision.
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