An Annuities Primer

Though popular among today's aging Baby Boomers and members of the Mature or "Senior" markets, annuities can be traced back to ancient Greece. The term "annuity" comes from the Greek word "annus"-or "year"-and refers to annual income payments. Similarly, in ancient Rome citizens would make one-time payments to a contract called "annua" in exchange for lifetime payments made once a year.

In 17th century Europe, annuities were used as fundraising devices by governments to finance their ongoing wars with neighboring nations. These governments would offer "tontines," which promised payments into the future to those who bought shares.

In the 18th century annuities were introduced to North America, with private insurance companies selling insurance and annuity contracts to individuals wanting to avoid outliving their resources, In 1759 in Pennsylvania a company was formed to benefit Presbyterian ministers and their families. The ministers would contribute to a fund, in exchange for lifetime payments. In 1912, the Pennsylvania Company for Insurance on Lives and Granting Annuities became the first American company to offer annuities to the public.

However, annuities experienced a huge growth in popularity during the late 1930s when the collapsing financial markets turned many people away from equities in favor of products from more secure institutions-insurance companies that could and did make annuity payments, as promised.

Early annuities were simple contracts guaranteeing a return of principal and fixed rates of return from the insurance company during the accumulation phase. At withdrawal, the annuitant chose either a fixed income for life or payments over a specific number of years.

Buyers have always been drawn to annuities by their tax-deferred status. As a consequence of being issued by insurance companies, annuities have always been able to accumulate without taxes being taken out at year-end, which has added the time value of money to their list of advantages.

The most recent major development has been the inception in 1952 of variable annuities, which offer the investment features of separate mutual fund accounts inside the annuity with the tax-deferral available from life insurance products. Variable Annuity owners choose the type of accounts to use, often receiving modest guarantees from the issuer in exchange for the greater risks assumed.

"The shift to investment-linked annuities has been so marked that 25,000 investment-linked annuities were sold [in 2001] - 9.5% of all annuity business," reports Peter Quinton is managing director of The Annuity Bureau, adding that "it's likely that the popularity of these annuity will continue to increase as they are the only at-retirement products that offer retirees a half-way house between the two extremes of purchasing a safe conventional annuity and opting for a investment-linked income drawdown plan, where the cross-subsidy system does not apply." Source: Pensions Management; 12/1/2002

Wider Choices

Although long part of well-diversified financial portfolios, annuities have continued to evolve. Recent developments have included features such as adding checkbook access to Variable Annuity funds, more attractive "bonus" rates, shorter maturity periods, and guaranteed death benefits.

But consumers now have wider choices of annuity types, plus more investment options and guarantees to fit their investment and income goals. For example, some annuities offer guaranteed bonus interest rates for the first few years or guaranteed returns for the life of the contract. Other annuities guarantee beneficiaries the return of principal if the annuitant dies and the annuity stock market investments have lost value.

Although annuities have evolved, their primary objective remains the same. That is, being able to lock in a guaranteed payout that cannot be outlived. As people live longer, healthier lives--and the equities markets remain subject to unsettling fluctuations--financial products offering safety, flexibility and guaranteed returns are increasingly appealing to older consumers. However, investors of all ages are drawn to variable annuities whose return is tied to the stock market, but which also offer guaranteed minimum returns not tied to market performance.

Annuities are accessible. Because there are no contribution limits, people can invest as much or as little as they chose in annuities no matter what their income levels. And this money grows on a tax-deferred basis until the accumulated earnings are distributed, usually at retirement.

Moreover, unlike other tax-deferred investments during the distribution phase, annuities' tax-deferred earnings are not counted in determining a person's income taxes on Social Security benefits. At the same time, while annuitants cannot outlive their guaranteed benefits, properly structured annuity contracts and beneficiary designations can:

1) avoid probate,

2) protect assets held in trust from mismanagement by a parent of guardians, and

3) continue benefits to the annuitant's heirs, thus making annuities effective multigenerational planning vehicles.

Market Overview

With their unique advantages, a growing market for annuities has grown among individuals with longer-term wealth accumulation and retirement planning needs, as well as individuals with immediate income needs. Let's consider how two types of annuities can be used to address the wealth accumulation and retirement planning problems we all face. These are:

? Non-qualified Annuities

? Qualified Annuities

Non-Qualified Annuities -- Non-qualified annuities are purchased with after-tax dollars to meet longer-term wealth accumulation or retirement planning needs--with emphasis on longer-term.

As noted, deferred annuities may not be appropriate for shorter-term wealth accumulation purposes - generally those that will materialize before age 59½; while immediate annuities are designed to provide long-term income - that is, income guaranteed for life.

Non-qualified annuities are used to fund cash accumulation programs that do not qualify for a front-end tax deduction; but whether an annuity is qualified or non-qualified, premiums always accumulate interest that is free of current income tax until withdrawn. But non-qualified annuities also allow owners to continue tax deferral beyond the age 70, the mandatory withdrawal age for traditional IRA's and qualified retirement plans.

Qualified Annuities-- Annuities can also accommodate tax-qualified money. A qualified annuity is used to fund a tax-qualified retirement plan such as a traditional IRA or an HR-10. Thus in most cases, premiums paid to qualified annuities are tax-deductible. For instance, when people change jobs and have 401(k) funds to move or already have IRAs and are seeking a more diversified portfolio. They can reduce their portfolio exposure by rolling the money over into an annuity without losing tax advantages.

Or suppose Alice inherits $20,000. If she doesn't need the money right away and wants to build a long-term nest egg, she might consider putting the inheritance into an annuity. By doing so, she'll gain the advantage of tax-deferral, and when it's time to withdraw funds from her non-qualified annuity, Alice will only be taxed on the accumulated interest, not the principal.

Generally, annuities are not suitable estate planning vehicles, but are useful in meeting immediate and retirement income needs. Thus, iif you're a candidate for wealth accumulation and retirement planning, remember: "The only person who can take care of the older person we will someday be is the younger person we are now."

Want More? Send questions and comments to w.willard3@knology.net

Bill Willard has been writing high-impact marketing and sales training for the financial services industry for over 30 years. Through interactive, Web-based "Do-While-Learning?" programs, e-Newsletters and straight-talking articles, Bill helps agents and advisors get the job done: profitably improving performance, skipping expensive mistakes, and making the journey to success faster, smoother, easier. And fun!

---

How Do I Lower My Auto Insurance Premiums?

It seems as though the price of everything is on... Read More

Life Insurance: Why Theres No Need to be a Desperate Housewife

Life insurance looks set to make a comeback in the... Read More

Auto Insurance for Young Drivers

The biggest worry of most parents today is their children... Read More

Group Term Life Insurance and the Options Available

Group term life insurance is more affordable than individual life... Read More

Medical Bankrupticies: What You Can Do To Protect Yourself

First the bad news: about 2,000,000 personal bankruptcies each year... Read More

Homeowners Insurance at a Glance

At first glance, homeowners insurance may seem perplexing and quite... Read More

The Life Insurance Quote Business is Booming, but is the Insurance Quote Accurate?

The life insurance quote business online is booming. Not only... Read More

Underwriting Life Insurance For Diabetics and Diabetic Life Insurance Information

Life Insurance Companies differ in their "underwriting philosophy" when it... Read More

An Intro To Life Insurance

There are many options available for life insurance, and for... Read More

Is Purchasing Travel Insurance Smart?

To answer the question "is purchasing travel insurance smart?" let's... Read More

What Does Buildings Insurance Cover?

You will find that your lender will insist that you... Read More

The Surety Bond Domino Effect

I have written many articles about the hard surety bond... Read More

Auto Insurance Basics

Most people only think that insurance is something they need... Read More

Talking to Your Parents About Insurance

Who can you talk to about auto insurance? Insurance agents... Read More

Accident Insurance Claim Personal Injury Insights

There's nothing that has a greater impact on evaluating a... Read More

What Is Term Life Insurance?

There are two different types of life insurance, term life... Read More

What Is Permanent Life Insurance?

Unlike term life insurance, permanent insurance policies such as universal... Read More

Free Money Saving Auto Insurance Tips

Our money saving auto insurance tips were written for one... Read More

Health Care and Health Insurance Costs Can Be Controlled Through Lifestyle Choices

As you probably know all to well, the cost of... Read More

Auto Insurance In Texas

If you are looking for auto insurance in texas, you... Read More

Motor Vehicle Accident Insurance Claim Guide

This is a FREE Insurance Claim GuideYour "Motor Vehicle" can... Read More

Finding California Truck Insurance

It's very easy to find California truck insurance on the... Read More

Business Insurance ? And What You Need To Know

Getting your business up and running is exciting, challenging and... Read More

Tips On How To Save When Buying Car Insurance

If you want to save money when you purchase your... Read More

10 Ways To Save On Car Insurance

For most people car insurance is a the single largest... Read More

Cheap Health Insurance - Health Insurance for The Self Employed

If you're self employed, you may think of health insurance... Read More

UK House Insurance - The Risk of Under-insurance

For many years in the UK, motor insurance has been... Read More

Car Insurance Advice for Young Drivers in the UK

Over the course of the last ten years, car insurance... Read More

Saving on Auto Insurance: The Road to Reduction

The road to saving on auto insurance is something that... Read More

What Price For Your Health?

How do you put a value good health? For many... Read More

Travel Insurance Pre-Existing Conditions Coverage - How It Works

What is a Pre-Existing Medical Condition?When a trip cancellation travel... Read More

Do I Need Travel Insurance?

In the United States health insurance, unlike many other countries,... Read More

How to Reduce Car Insurance Premiums

Here are some useful tips on how to reduce car... Read More