Frequently Asked Annuity Questions

Q: What is an annuity?

A: A contract from an insurance company that individuals generally use to accumulate money for their retirement on a tax-deferred basis and that guarantees a fixed or variable payment to the annuitant at some future time.

Q: What is a fixed tax-deferred annuity?

A: An annuity you purchase either with a single sum or with periodic payments to help save for retirement. Earnings in a deferred annuity are not treated as taxable income until they are withdrawn. Withdrawals may be subject to regular income tax, and if made prior to age 59 ½, may be subject to a 10% IRS penalty. In addition, company imposed surrender charges may apply. The policy owner can choose the point at which he or she can convert the accumulated principal and earnings in the contract to a stream of income.

Q: Are there savings advantages to choosing annuities?

A: Many people today are choosing tax-deferred annuities as the foundation of their overall financial plan instead of certificates of deposit or savings accounts. Although CD's and annuities are very similar there are significant differences between the two. The most important difference is that annuities allow for the deferral of the taxes due on the interest earned until the interest is withdrawn. By postponing the tax with a tax deferred annuity, your money compounds faster because you can earn interest on dollars that would have otherwise been paid to the IRS. Later, if you decide to take a monthly income, your taxes can be less because they will be spread out over a period of years. Like Certificates of Deposits, annuities have a penalty for early surrender; however, most annuity contracts have a liberal "free withdrawal" provision.

Q: What tax advantages do annuities offer?

A: You pay NO taxes while your money is compounding. You can also pay a lower tax on random withdrawals because you control the tax year in which the withdrawals are made, and only pay taxes on the interest withdrawn, Tax deferral gives you control over an important expense - your taxes. Any time you control an expense, you can minimize it. The longer you can postpone this particular expense, the greater your gain when compared to the gain you would make with a fully taxable account.

Q: What are the tax implications of transferring cash-value life insurance, annuities, or 401(k) money?

A: Section 1035 of the tax code allows for the tax-free exchange between like accounts: annuity to annuity, life insurance policy to life insurance policy, and life insurance policy to annuity. However, you cannot go from an annuity to a life insurance policy because of the additional benefits of the life policy face value.

Q: What's the advantage of tax-deferring my money through an annuity?

A: To illustrate the increased earnings capacity of tax-deferred interest, compare it to fully taxable earnings. $25,000 at 6.0% will earn $1,500 of interest in a year. A 28% tax bracket means that approximately $420 of those earnings will be lost in taxes, leaving only $1,080 to compound the next year. If these same earnings were tax deferred, the full $1,500 would be available to earn even more interest. The longer you can postpone taxes, the greater the gain.

Q: What are the different types of deferred annuities?

A: The two most common deferred annuities are fixed annuities and variable annuities.

Q: What is a variable deferred annuity?

A: An annuity under which the policy's premium is invested in a variety of investment divisions and the accumulated value fluctuates with the performance of the investment divisions.

Q: What is a fixed deferred annuity?

A: An annuity where the individual knows what the current and guaranteed interests rates are and when the interest will be credited to the funds in the annuity. Rates are usually guaranteed for a specified time period. After the specified time period, the policy will generally receive a new interest rate every year equal to the standard rate being credited by the issuing company at that time.

Q: What is the difference between a deferred and an immediate annuity?

A: The key difference is that a deferred annuity is a long-term vehicle, designed to accumulate assets over time. When you are ready to receive income, usually at retirement, you can convert your savings to a steady stream of income that meets your needs. Immediate annuities are designed to begin making annuity payments right away or within a short time afterward. In addition, deferred annuities may be purchased with a lump sum or multiple contributions. An immediate annuity is usually purchased with a single lump sum contribution.

Q: What is the difference between an annuity and a Certificate of Deposit (CD)?

A: A Certificate of Deposit (CD) is an interest-bearing account with rates that you can lock in for a given period of time. An annuity is very similar in that you can guarantee a particular rate for a given period of time, but there are some primary differences. The primary difference is that interest earned on your money with an annuity is tax-deferred, whereas interest earned with a CD is taxable each year. A CD is issued by a bank or financial institution and is guaranteed by the FDIC. The issuing insurance company guarantees an annuity.

Q: What is the difference between a mutual fund and a variable deferred annuity?

A: Annuities and mutual funds can each play an important part in a financial plan. However, they are different products, designed to meet different needs and time horizons. Both offer professional money management and pooled investment vehicles. Mutual funds may be appropriate for short, intermediate and long-term goals. There are many types of mutual funds, ranging from conservative to aggressive risk levels.

Variable deferred annuities are long-term vehicles, designed to help your assets grow and provide a steady stream of income in retirement. Variable annuities offer the following features that are not provided by mutual funds:

  • Tax-deferred growth. No taxes are due until you take a withdrawal. Unlike a mutual fund, however, any taxable withdrawals from an annuity before age 59½ are generally subject to a federal tax penalty of 10%. Ordinary income taxes also apply to earnings.
  • Choice of investment portfolios. These stock and bond investment options may be managed by the same portfolio manager and have the same investment objective as a similarly-named mutual fund. However, they invest in separate and distinct portfolios from any publicly-available mutual fund and the underlying portfolios have different holdings and fees, so their performance can vary.
  • Tax-free transfers among the investment choices. No taxes are due when you transfer money from one funding choice to another within an annuity.
  • Guaranteed Income for Life. You can convert your savings into a steady income stream that cannot be outlived.
  • Guaranteed Death Benefit. A variable annuity can provide a death benefit that guarantees your beneficiary will receive at least what you contributed to the account, less withdrawals and fees, if you should die before the income payments begin. The death benefit can increase over time.

 

A variable deferred annuity may have higher annual expenses than a mutual fund. In addition to portfolio management fees, annuities generally have a separate account charge.

Q: Which type of annuity should I choose?

A: There is no single annuity that fits everyone. Choose the one that best reflects your financial goals, your stage in life, your financial means and your comfort with risk. No matter what your financial goals are, however, you can probably find an annuity that suits you. The first question is whether you want a deferred or an immediate annuity.

  • If you are accumulating funds for retirement, you probably want a deferred annuity. With this you will not be drawing any income from it until retirement.
  • If you want to convert a lump sum into a stream of income, you probably want an immediate annuity.
  • A fixed-rate annuity might be appropriate for you if you prefer minimal risk or already have part of your holdings in higher risk investments. It is usually considered a wise choice for people who value a bit of stability in their financial holdings or want to know the exact return on the annuity purchased.
  • A variable annuity might suit you if you have a higher tolerance for risk or are eager to stay involved and are educated in market investment strategies.

 

The equity-indexed annuity falls somewhere between fixed-rate and variable annuities in terms of risk and potential reward. An equity-indexed plan offers the potential for higher returns than a fixed-rate annuity but less risk than a variable product.

Q: How will I know what the return is with a variable annuity?

A: The agent you purchase the annuity from can help you with performance statistics from their past experiences. A variable annuity will have the funds you put up placed in a mix of investment vehicles that spread the risk of the investment over several sectors.

Q: Why would a deferred annuity not be right for me?

A: A deferred annuity might not be appropriate if you:

  • Have no other source of "ready cash" for small emergencies.
  • Cannot set aside a premium contribution for a relatively long period of time, such as five to seven years. The main drawback of an annuity might be that the funds you put in are not easily accessible. You can withdraw them, of course, but if you do so early in your contract you may have to pay surrender penalty fees - in addition you may be subject to a 10% tax penalty if you withdraw the funds before you are 59 +.
  • Have not made the maximum contribution to a 401(k) tax-qualified plan. If your employer offers a 401(k) plan, contribute as much to it as you can. Your contributions are tax-deductible, and your employer will often match some of your contributions.
  • Have significant high-interest credit card debt. As a rule, it is more cost-effective to pay down high-interest debts before considering any investment alternative.

 

Q: Why might I want to purchase an immediate annuity?

A: If you want to convert a lump sum into an income stream starting immediately, want a lifetime income, or seek a wide range of payout options in order to provide income for specific financial needs or to provide for a spouse, an immediate annuity may be the right option for you.

Q: Why might I not want to purchase an immediate annuity?

A: If you are likely to need your money as a lump sum an immediate annuity might not be a good choice for you. You often cannot "cash out" an immediate annuity, and even if you can, significant penalties may be involved.

Q: What are my income options with annuities?

A: When you are ready to take distributions, you may choose from a variety of retirement options. Income options include lifetime income, joint and survivor lifetime income, or payments for a fixed number of years. You may also arrange a tailor made income option for your specific income needs.

Q: Where can I get the latest annuity rates and an annuity illustration?

A: You can use our instant annuity calculator for up to date quotes on your specific needs.

Q: What is the Open Market Option?

A: The annuity market is very competitive and the rates differ between companies. You can substantially increase your pension income by purchasing your annuity from the company which pays the most income. This is called "Exercising the Open Market Option". It costs nothing to take advantage of this option and new rules introduced recently by the FSA means that insurance company must tell you about this option. Check out the best annuity rates.

Q: When will my money mature?

A: An annuity policy does not "mature" like a bond or certificate of deposit. Both your principal and interest will automatically continue to earn interest until withdrawn and you reach age 100. You can let your money continue to grow, make withdrawals, or begin receiving an annuity income at any time.

Q: What charges are involved with the purchase of an annuity?

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Q: Are there any consequences for lying on my annuity application?

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What forms of payment are accepted or required in order to purchase an annuity?

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Q: How can I purchase an annuity today?

A: Contact Customer Service at 1-866-866-1999 from 8AM to 8PM EST, seven days a week.

 

Q: Are there ever "sales" on annuities?

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Q: How can I be certain that purchasing annuities from TotalReturnAnnuities.com is legal?

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Q: How long has TotalReturnAnnuities.com been in business?

A: TotalReturnAnnuities.com has been in business since 1983. Click here to view information about TotalReturnAnnuities.com

Q: Is TotalReturnAnnuities a member of the Better Business Bureau?

A: Yes, TotalReturnAnnuities is a member of the Better Business Bureau since

Q: How long does it take to process the purchase of my annuity?

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Q: How soon can I start receiving payments with the purchase of an immediate income annuity?

A: Normally, one receives the first payment from the purchase of an immediate income annuity one month from the day the insurance company receives the last piece of paperwork.

Q: I live outside the U.S, but I am a U.S. citizen, am I eligible to purchase an annuity?

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Q: I live outside the U.S, but I am not a U.S. citizen, am I eligible to purchase an annuity?

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Q: I live in the U.S, but I am not a U.S. citizen, am I eligible to purchase an annuity?

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Q: How do I make a change to my annuity? (Change my beneficiary, change my address, file a death benefit claim, etc.)

A: Contact Customer Service at 1-866-850-1011 from 8AM to 8PM EST, seven days a week.

Q: How can I change my name on an annuity contract?

A: To change the name on an annuity, the current contract owner must send a signed Name Change Request form, a written request, a copy of a marriage certificate, or other court document with the necessary information to the Service Center.

Q: Can I change a beneficiary after the death of the insured?

A: It's difficult but not impossible to change a beneficiary after the death of the insured. But going through a dispute can be a lengthy - and costly - process.

Q: How can I withdraw funds from my annuity?

A: Contact Customer Service at 1-866-866-1999 from 8AM to 8PM EST, seven days a week. If you are a person who enjoys "playing" with your money and may have the desire to withdraw the money very quickly, an annuity is not the correct product for you. It is important to keep in mind, though, that the interest you earn on money in a checking account is taxable, whereas the interest you earn on an annuity is not taxed until withdrawn. You can also choose to diversify your money by keeping a certain amount in your checking account, available for immediate withdrawal, and placing the rest in an annuity as a conservative cash accumulation vehicle.

Q: How do I make a payment for my existing annuity?

A: Contact Customer Service at 1-866-866-1999 from 8AM to 8PM EST, seven days a week.

Q: How can I get the unit value of my annuity funds?

A: Contact Customer Service at 1-866-866-1999 from 8AM to 8PM EST, seven days a week.

Q: Can I borrow money against my annuity?

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Q: Can I sell my annuity?

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Q: Can I avoid probate by investing in annuities?

A: If a premature death should occur, the accumulating funds within your annuity might be transferred to your named beneficiaries, avoiding the expense, delay frustration and publicity of the probate process. Like most assets, the annuity is part of your taxable estate. Your heirs can choose to receive a lump sum payment or a guaranteed monthly income.

Q: What happens if I surrender my annuity?

A: Surrendering an annuity, particularly during the policy's first five to seven years, will result in surrender fees. Check your policy on exactly how much those fees will be. There could be other charges involved, too, including a 10 percent penalty for early withdrawal if your policy has tax savings provisions. Read the fine print in your policy. It should tell you how much it would cost you to get out of your annuity.

Is the cash value of an annuity free from creditors if the owner files for bankruptcy?

A: Bankruptcy is one of the few situations when state law supersedes federal law, so whether your cash value is protected from your creditors depends on the laws of your state.

There are provisions in federal law that can protect certain types of property from creditors in bankruptcy cases, but Congress gave each state the right to develop its own rules or to decide that the federal rules are applicable.

If federal bankruptcy law is applicable in your state, you can "exempt" up to $8,625 of accumulated cash value from the assets that creditors can claim. Furthermore, if you don't have or don't need the full exemption for real estate, you may also be able to protect another $8,000 of cash value from your creditors under federal bankruptcy rules.

Q: How can I find out if my deceased relative had life insurance?

A: Unfortunately, there's no clearinghouse of information on life insurance policies. Here are some suggestions:

  • Go through canceled checks or contact your deceased relative's bank for copies of old checks. If he or she wrote checks to pay premiums, the insurer's name should be listed on the checks.
  • Check old credit card statements. Your relative may have paid premiums by credit card.
  • Check probate court records for details of your relative's estate. If the estate has gone through or is in probate court, a life insurance policy could show up as an asset.
  • Contact any past employers to see if your relative had group life insurance.
  • Contact other family members (i.e., brothers, sisters, or children) who may have been privy to your relative's finances. Perhaps they will know if he or she had insurance and from whom it was purchased. Also ask your relative's lawyer, banker, or accountant.
  • Track down your relative's auto or home insurance agents. They may have sold him or her a life insurance policy or at least know from whom it may have been purchased. The agent can also query the home office of the company to determine if there is a policy on file for that client. Under the new HIPPA guidelines, there may be legal requirements before any information can be released, but you will know what the policy is there to make the request.
  • " If your relative bought life insurance fairly recently, there might be a trail of the companies to which he/she applied. The Medical Information Bureau maintains a database that might show if insurers requested your relative's medical information within the past seven years. Record searches can be requested through the Disclosure Office of the MIB and cost $8.50.

 

Keep in mind that if no beneficiary comes forward to collect the death benefit, and your relative's insurance company cannot locate a beneficiary, the insurer has to hand over the death benefit to the state within a certain period of time (usually three years, although it varies by state). After the state receives the death benefit, a beneficiary still can come forward to collect the proceeds.

Q: If I'm a beneficiary, do I have to pay income taxes on a death benefit?

A: No. Death benefits from life insurance policies are free from income tax. However, the death benefit may be subject to estate and inheritance tax. Check with the agent who sold the policy, the insurance company, or your own financial planner for details.

Q: Is a variable life insurance policy or a variable annuity (VA) a suitable financial product for parents to use to save for a child's college education?

A: No, a variable life insurance policy is not a wise choice to use as a savings vehicle for a college education for the following reasons:

  • Although variable life insurance has cash value that can increase over time if your underlying investments in the policy perform well, you are also paying life insurance premiums that are quite expensive. Those premium payments will significantly eat into the gains you could make on your cash value.
  • The cash value of a life insurance policy should not be considered an investment because any partial withdrawals or loans that you do not pay back will reduce your death benefit. So if you don't pay the loan back, your beneficiaries will when you die.
  • If you partially withdraw or take out a loan against your cash value, and the withdrawal or loan amount exceeds the premiums you have paid into the policy, you will be taxed on the difference for variable life policies.
  • If you choose to surrender your variable life insurance policy, you also may have to pay a surrender fee to the insurer. Check your policy language for more details.

 

A VA can be considered as a retirement planning tool, not as an investment vehicle to save money for a college education. Here are some reasons why:

  • VAs carry high fees because the insurance company must charge you for the risk it is assuming to guarantee you a lifetime income. While the average fee for a VA is 2.12 percent, the average fee for a mutual fund is 1.37 percent, according to Morningstar Inc., a research firm that tracks VAs and mutual funds.
  • Many VAs require that you pay a surrender fee to get out of the contract. The surrender period is usually seven to eight years, and the rate drops each year you're in the contract. For example, you might pay an 8 percent surrender fee if you surrendered in the first year, 7 percent in the second year, and so on. You don't face those kinds of surrender fees in most mutual funds. These fees are often referred to as "back-end sales loads," or "contingent deferred sales charges."
  • You will pay a penalty tax if you withdraw money from a VA before age 59½. You do not face such restrictions with a mutual fund. Also, mutual fund returns are taxed at a capital gains rate, while variable annuity returns are taxed at your ordinary income tax rate, which is much higher.

 

Q: Can you send me a printed catalog further explaining annuity products?

A: We send our popular magazine called the Annuity Shopper ($15 value) with your request for quotes on immediate income annuities.

Q: I have a question about annuities that that I have not found the answer to here on your FAQ page. What do I do?

A: Contact Customer Service at 1-866-866-1999 from 8AM to 8PM EST, seven days a week.

For expert help with your annuity call toll-free 866-866-1999
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