Understanding

"FIXED ANNUITIES" 

What is a Fixed Annuity? Why would anyone want one? What are the features and benefits and 

drawbacks? Are they all the same? Which company would be the best? Which annuity might be

best for you? Fixed annuities are widely used for many reasons. Why?

NOTE: annuities are NOT used for their tax-deferred growth when combined with an 

IRA. There are many other reasons (as described here) for using an annuity, since an 

IRA already offers tax-deferred growth without the use of an annuity. The newly 

proposed Bush's RSA Retirement Savings Accounts and LSA Lifetime Savings accounts 

may change a lot of investing strategies. E-mail me for updated details on these NEW 

RSA and LSA retirement plans.

The two main reasons are because they offer Safe, Guaranteed*, Competitive interest rates

for growth and/or income and you pay NO income taxes on your gains until you take 

withdrawals.

·         Safety of principal

·         Competitive Rates

·         Tax-Deferred accumulation

·         NO up front costs-100% of your money goes to work immediately

·         Access to your money –a surrender penalty may apply on excess early withdrawals

·         Guaranteed* death benefits-payable outside of Probate

·         Control of income and taxes (you determine when you take money out and therefore, 

when you want to pay the taxes on the gains). You’re taxed at ordinary income tax

rates rather than at capital gains tax rates.

·         Opportunity to create an income you can't outlive for LIFE

·         Can be used for ANY kind of money, including IRA’s, 401k rollovers and much more.

·         Note however that fixed rate investments, such as fixed annuities, over extended periods

of time may not offer direct protection against the possibility of inflation.

Let's look at a hypothetical example to illustrate:

Jane, age 60**, has $100,000 she wants to keep safe, she wants it to grow at a reasonable 

rate and she doesn't want to pay any unnecessary income taxes. The fixed annuity may be an 

appropriate place to put her money. Jane first determines how long she wants her money to 

be in the annuity, that's why they offer a wide range of contracts ranging from as short as 1 

year to as long as 16 years. The most common time-frames are 3, 5, 6, 7, 8, 9, 10, 12 and 

15 year annuity contracts. Let's say she can probably get by without using this money for 5 

years (but just in case she needs it, she COULD get it out of the annuity if absolutely 

necessary. This will be explained in more depth later).

Jane might pick a 5 year annuity contract. In this example, let's assume the rate offered for 

the 5 year annuity contract is 5.35%. In MOST cases, the fixed rates offered by annuity 

companies are almost always higher than savings accounts or typical CD rates, that's often 

WHY people use them. NOTE: rates change and therefore this example may be not 

be correct at the time you read it. Always check with your Financial Advisor for 

up-to-date rates.

NOTE: Annuities are NOT FDIC insured as compared to CD's which are FDIC 

insured, as offered by banks.

At the end of the 5 years, Jane's $100,000 would have grown to $129,770 if she simply 

let the interest accumulate and compound within the annuity. She pays NO income taxes 

on that growth, as long as she doesn't take anything out of the annuity. (Withdrawal of 

earnings are always taxed as ordinary income, when withdrawn, but not until it is 

withdrawn, from an annuity.) 

If Jane had her money in any other type of investment that required her to pay income 

taxes each year on her earnings, and she is in a 28% tax bracket, she would have only 

been able to accumulate $120,802 after income taxes. Therefore, having her money in 

the annuity and deferring the taxes on the earnings each year, by allowing it to accumulate 

in the annuity may be a definite advantage. 

The above example illustrates why many people may be better off with their money in 

a quality fixed rate annuity instead of in CD's!

At the end of the 5 years she can pull her entire $129,770 out and walk away from the 

annuity. (Of course, she will be required to pay income taxes on her gains, the $29,770.) 

Frequently some uninformed people say that annuities cost too much, so don't use them. 

This type of advice is absolutely WRONG! To prove the point.....

Assume Jane wants an income stream from her $100,000. Again she puts $100,000 into 

the annuity and simply has the company send her a check every month, or quarter or 

each year for the interest earnings. Which using the same scenario as above with the 

5.35% rate, she would receive a check each year for $5,350 (which of course is income 

taxable). At the end of the 5 years, she pulls her $100,000 out and walks away, if she likes.  

So where is the cost? She gets all the growth and gains! She receives a TRUE 5.35% 

on her money!

What are the advantages of a Fixed rate annuity over a CD?

(DISCLOSURE NOTE: CD’s are often FDIC insured, if purchased through most banks.

Annuities are not FDIC insured.)

Fixed annuities are Safe, Secure, Dependable and easy to use. Most all fixed annuities 

have the ability to withdraw up to 10% per year without incurring any expense or 

additional fees. They are designed this way to allow people to withdraw an income, 

if that is their desire. A few even offer higher withdrawal amounts up to as high as 

15% in some cases. But not many.

IF you exceed the withdrawal limits then there can be added fees or penalties. This 

is to discourage people from withdrawing all their money or taking out too much-too 

soon. Check with your Financial Advisor and make some comparisons to make sure 

you are getting what you want and need. 

Longer term annuity contracts, such as a 10 year or a 15 year annuity normally offer 

higher Guaranteed* rates than shorter annuity contracts.

POTENTIAL COST and COMMISSIONS! Keep in mind that money sitting in 

a coffee can WILL NOT earn any interest. Right? Money must be invested or put to 

work somehow, in order to generate interest or produce a gain of some sort. When 

you entrust your money to an annuity company (in most cases an insurance company) 

they re-invest your money. They loan it out, they purchase securities with it and etc. 

in order to put the money to work to produce the interest or gains and growth. 

Therefore, your money is not just sitting in some coffee can or account somewhere 

doing nothing, it is working. Therefore, if you change your mind and decide to 

withdraw all of your money ahead of time, before the contract ends, your money 

must then be UN-invested, and gotten out of wherever it was invested so they can 

give it back to you. This may cause losses or at least the money will not have had 

time enough to accomplish its purpose and earn the interest or make a gain or profit, 

as the money-manager's had originally anticipated it would. This premature 

UN-investing of money often brings with it certain penalties or at least a lack of 

earnings. As well all know, it takes time for money to make money, and in this respect 

annuities are no different than any other form of investing. Remember, the annuity 

company needs to make a profit as well, so they can stay in business. Right? 

It's ONLY when you withdraw an amount that exceeds the normal contract 

withdrawal limits, or you withdraw all your money too early, that you might incur 

a penalty. The SAME thing holds true for CD's and most any other form of 

investment!

People who offer and sell annuities, like myself, are paid a commission, and 

rightfully so. We earn  it! That's our business. Keep in mind, NO commission 

or fees comes out of your money up-front. 100% of your money goes into 

the annuity and goes to work, from the very start.

The annuity company pays the salesperson their commission out of the company 

funds, not your money. Therefore, they are advancing us a commission based on 

the fact that the annuity owner will keep their money in the annuity contract for the 

full length of the annuity contract. So we are paid at the beginning of the annuity, 

in most cases, not at the end. As a result of this, if a person withdraws their money 

prematurely, before the end of the contract, then and ONLY then, the annuity 

owner pays what is called a "contingent deferred sales charge" or (CDSC). Which 

is a declining charge, in most cases, reducing each year down to ZERO. The longer 

the money stays in the annuity, the smaller the charge to get the money out. 

NOTE: some, not all annuities, contain riders, at an additional cost, which in some 

cases will WAIVE any (CDSC) "contingent deferred sales charges", in the event 

of Terminal Illness or possibly Nursing Home confinement and/or Unemployment  

waivers. Meaning, in the event the annuity owner has an emergency and needs to 

withdraw the balance of their money, prematurely, before the end of the contract, 

the CDSC fees would be waived in these cases. These riders are not always 

available on all contracts and may not be available in all states. Check with your 

financial advisor, the issuing company or read the corresponding prospectus 

and/or contract.

OWNER- ANNUITANT- BENEFICIARY: Every annuity has several 

components to it. 

The owner is the person who originally puts the money into the annuity and 

controls it. They have the right to make changes to it, they own the money 

inside the annuity as well (and for estate planning purposes) it is also included 

in their taxable estate. The owner can be more than one person, and they 

don't always have to be related, such as husband and wife. Even a Trust, a 

son or daughter, or even a friend could be the owner.

The annuitant is the person who is supposed to get the money if it is paid 

out at the end of the contract, or as an income stream while the annuity contract 

is active. This CAN BE someone other than the owner (above). The annuitant 

can also be more than one person, in some cases. So it could be paid out to 

more than one person.

The beneficiary! Since most annuities are issued by life insurance companies 

(but not always).  Annuities are contracts and can be passed on to a named 

beneficiary (like a life insurance policy). And there can be more than one  

named beneficiary. Money paid to named beneficiaries are paid directly to 

them and does NOT go through Probate. This is another common reason 

why people often use annuities. They avoid Probate!

There is a LOT of flexibility and control by using annuities to pass assets 

onto loved ones, very effectively and outside of probate. Annuities can 

even name a Trust as the beneficiary for even greater control and added 

flexibility.

"ANNUITIZATION"

Opportunity to create an "INCOME YOU CAN'T OUTLIVE"!

Annuities (both fixed, Indexed and variable) are the only investment product 

that offers a person or couple, the opportunity to exchange their annuity for 

an INCOME for LIFE! One you can't outlive! "ANNUITIZATION"

There are some minor differences between companies and the various annuity 

contracts, but in general most all of them offer a variety of "annuitized" annuity 

contracts. In brief, an "annuitized" annuity can provide you with a several Income 

Options allowing for a guaranteed* income stream that will last either for YOUR 

LIFETIME, a JOINT LIFETIME (with you and another person) or for a 

specified FIXED time period. When you "annuitize" an annuity contract, in most 

cases, you are trading the assets in your annuity to an insurance company, who 

in turn will guarantee* to pay you AS AGREED (which in most cases is for LIFE) 

depending on what payout method you might choose. 

For example: a person can get a LIFETIME Guaranteed* income with a minimum 

of 5 years certain, 10 years certain or even 20 years certain. This assures a person 

that even if they were to die prematurely, their heirs would receive what's left. 

There may be others options as well, depending on the company and the annuity 

product chosen.

RATES & BONUSES!

Some fixed annuities offer a FLAT fixed rate that applies to each and every year 

of the contract. Some annuities offer a BONUS in the 1st year and then a lower 

rate for the remaining years, when added together will average out to a specified 

rate. For example, if they offer 7%, they are most likely offering a 2% BONUS 

in the first year added to their normal fixed rate of 5% for the remaining years, in 

order to get the total rate of 7%. 

Why do they do this? Simple, two reasons! One, they know that MANY people 

have their money in investments that if withdrawn before it matures, there might 

be a penalty. This added BONUS is often enough to offset or compensate for 

those extra fees. The Second reason, they want your business! It's an enticement, 

pure and simple. 

If you think about it, then it's easy to understand WHY the annuities companies 

have the "CDSC"- "contingent deferred sales charges". If they didn't, a person 

might put their money into an annuity, collect their BONUS, and then withdraw 

all their money, keeping the BONUS. Obviously that wouldn't work! Bonuses 

can be good, but keep in mind that in order to get them, (some fees might be 

higher in variable annuities, not fixed annuities) and it normally requires you to 

keep your money in the annuity for a longer time to justify them giving it to you.

WHICH COMPANY? - WHICH ANNUITY? There are literally thousands 

of companies and sales personnel that offer fixed annuities. Banks, your local 

car and home owners insurance agent, fraternities, brokers, attorneys, accountants, 

etc. Fixed annuity sales people do NOT have to be a securities licensed, 

knowledgeable, educated, professional Securities Registered Representative in 

order to sell FIXED annuities. ANYONE with a state issued life insurance license 

can (in most cases) sell a FIXED annuity. So make sure you work with someone 

knowledgeable and reputable. 

A license to sell a FIXED annuity or a life insurance policy doesn't mean they 

know what they are doing. It also doesn't mean they represent a company with 

a high rating or good reputation. There's LOTs to learn which takes years. I've 

simply scratched the surface on this subject in this brief article. (I know, you 

probably think it's going to go on forever. Right?)

The point is! Select a REAL Professional to assist you in choosing the RIGHT 

annuity for you. Also, choose a QUALITY company! It could make a difference. 

A BIG difference! I only use the HIGHEST rated companies for my clients to 

put their money with. WHY?  The Guarantees* offered by the company you 

select are ONLY as good as the strength of that company and their ability to 

keep those promises and pay their annuity contract owners the money they owe 

them. Right? There are NO other Guarantees! Therefore, you want the strongest, 

most reputable company you can find to put your money with. I always try to 

use companies that maintain the highest ratings as Rated by: A.M. Best, 

Standard & Poor's and Duff & Phelps.

** Annuities offer tax deferred growth and are primarily designed for long term 

growth. If a person withdraws money from an annuity prior to age 59 1/2, they 

are subject to an "early withdrawal penalty" of an added 10% owed to the IRS. 

However, if a person under the age of 59 1/2 wants to make withdrawals, they 

can use, what is called, a 72(q) to establish an income stream from an annuity 

to avoid the additional 10% IRS penalty. For withdrawals of IRA money from 

an annuity, they can use this same method, it is called a 72(t). For information 

on how to do this GO HERE

NOTE: All Guarantees are based on the financial strength and claims 

paying abilities of the company chosen for your annuity.

My goal, as a Financial Advisor is to provide my clients with information, 

products and services, that can help you achieve your dreams and fulfill 

your needs, the best ways possible. Feel free to contact me for more 

information and the specific names of the companies referred to in this 

and other articles on my web site. 

The above information is NOT an offer to sell a product. Is it simply to 

provide information.  For questions, or to receive information on anything 

described here E-MAIL me if you like   or call me at 1-800-577-8057 

anytime (day or evening).

Using a FIXED ANNUITY for RMD "required minimum distributions" GO HERE

Using a FIXED ANNUITY for a 72(t) IRA early distributions GO HERE

What is a 72(t)? (for early IRA distributions prior to age 59 1/2) GO HERE

Using "Split-Annuities" to provide an income you can't outlive. 

List of Financial Services

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