ANNUITY

What is an annuity?
Annuities are essentially a series of
fixed payments required from you or
paid to you at a specified frequency
over the course of a fixed period.
Characteristics of an Annuity
Insurance Product
Annuities are sold by life insurance companies and
considered to be an insurance product. Any guarantees
or benefits provided by the annuity contract are the
obligations of the insurance company and not backed by
any government insurance.

Tax Penalties
Annuities are retirement savings products, and there are
tax penalties if the earnings are withdrawn before the
annuitant reaches age 59 and a half. Early withdrawals
are subject to regular income tax on the earnings plus a
10 percent tax penalty.
Withdrawal Penalties

Annuities have no upfront sales charges or commission.

The full deposit to an annuity goes to work earning money.
Annuities do have withdrawal fees that the insurance
company will keep if money is withdrawn during a certain
period, usually five to seven years after the annuity is
purchased.

Income Options

A unique feature of annuities is the different income

options available when the owner reaches retirement
age.
TYPES OF ANNUITIES
•

(1)Ordinary
annuities:
Payments are required
at the end of each
period.
(2)Annuity due:
Payments are required
at the beginning of each
period.
Example:Rent
Calculation of PV and FV
of Ordinary Annuity
Mathematically,

PV of ordinary annuity=C*[{(1+r)^n-
1}/r(1+r)^n]
FV of ordinary
annuity=C*[{(1+i)^n-1}/i]
Calculation of PV and FV
of Annuity due
Mathematically,
PV of
an Annuity due: C*[{(1+r)^n-
1}/r(1+r)^n]*(1+r)
FV of an Annuity due:
C*[{(1+i)^n-1}/i]*(1+i)
 The pros of annuities
Pro 1: You Can Receive Regular Payments
The most basic feature of an annuity is that you receive
regular payments from the insurance company. This is also
the biggest pro of an annuity. Those payments provide
supplemental income during your retirement and can help if
you’re afraid that you haven’t saved enough to cover your
regular expenses.

Pro 2: Your Contributions Grow Tax-

Deferred
The money that you contribute to an annuity is tax-deferred.
That means you can contribute money before you pay taxes
and you do not have to pay taxes on the money until you
withdraw it (i.e. until start receiving payments).
 Pro 3: A Fixed Annuity Offers Guaranteed
Returns
The insurance company will invest any money that you put
into an annuity. There is always a certain level of risk
involved when you invest money. However, any contract you
sign for a fixed annuity should include certain guarantees to
prevent you from losing money. Fixed annuities guarantee
that you make a certain percentage of your principal
investment.
Pro 4: A Variable Annuity Offers a Death
Benefit
Variable annuities carry risk because they have the potential
to actually lose you money. They also carry an extra benefit:
a death benefit. A death benefit is a payment that the
insurance company will make to your beneficiary if you die.
 The Cons of Annuities
Con 1: High Fees
Annuities can get very expensive. Any time you consider
an annuity contract, you need to understand all the fees in
that to be sure that you can pick the best annuity for your
goals and situation. Variable annuities have administrative
fees as well as mortality and expense fees.
Con 2: Annuity Growth Might Not Match
Stock Market Growth
It’s important to understand how the cost of an annuity is
impacting your returns. The stock market will make gains
in a good year. That could mean more money for your
investments. At the same time, your investments will not
grow by the same amount that the stock market grew.
 Con 3: Getting out of an Annuity May
Be Impossible
This con is a concern for immediate annuities. Once you
contribute the money to fund an immediate annuity, you
cannot get that money back or pass it on to a beneficiary. It may
be possible for you to move your money into another annuity
plan, but doing so could also leave you subject to fees.

Con 4: An Annuity and a 401(k) May Be

Redundant
Some employers provide the option of investing in annuities
through a 401(k). This option is actually growing in
popularity because people view it as a safe way to invest
401(k) money. The trouble is that you don’t really get the full
benefits of an annuity is you have it through a 401(k).
 Why should we buy an annuity ?
Protecting your principal 
Conservative types of annuities, especially fixed-rate
annuities, can be good vehicles to protect your money.
For safety, Haithcock lumps them with bank certificates
of deposit, money-market funds, Treasury securities and
insured municipal bonds.

Generating income for life

.
This is why annuities were created centuries ago, and it
remains the fundamental reason to buy one. You can
structure an annuity to receive payments now or later, for
you and/or a spouse, for life or for a specific number of
years, and so on
Leaving a legacy to others
If you're looking to generate big returns that you can leave to
a spouse, children or others, you might want to favor
variable annuities, which provide investors with a range of
growth-oriented stock funds, with greater appreciation
potential (and more risk).

Meeting long-term care needs

Some annuities can help you pay for long-term care, should
you need this type of assistance. This could be attractive if
you can't afford, or don't think you could medically qualify
for, a regular long-term care insurance policy for which
underwriting can be more stringent.
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