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 What is an annuity

This is a more complicated question than one might realize. So what is an annuity?  The standard definition from the dictionary is listed below but it does not really help to answer the question.

Best Growth Annuities For 2015

Companies are offering a number of fixed indexed annuities with uncapped strategies for 2015.   Given the similarities between the various uncapped options it can be hard to tell which companies are offering the best growth annuities for 2015.  Although the options with uncapped growth annuities seem endless, they all are relatively similar.  The key if identifying the common components of indexed annuities and comparing them between the companies.  A list of the key areas is provided below. Read more

Annuity Income Rider:  Payouts Can Differ

When purchasing an annuity with an annuity income rider, it is important to understand that payout amounts can differ based on the issuing company’s policy. Because payouts can differ between companies, it is important to choose the right company before you invest your money. Below are payout overviews from both Nationwide and Genworth so you can compare the two.  This way you can make a more informed decision. An informed consumer is a smart consumer.  We want to give you any and all the information you need to help you feel comfortable with your choices.

Nationwide’s  annuity growth is based on interest earned.  However, once income starts that income amount remains in effect for life.  Therefore, a 55 year old making a $100,000 deposit, taking income in 10 years would receive $9,905 annually.  This income would start from age 65  and continue through age 75. These payments would add up to a total payout of $108,955.

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Americo LibertyMark 15% Bonus Annuity

Americo LibertyMark 15% bonus annuity.  Until recently, the state of Connecticut has given approval to very few bonus annuities.  Equitrust had the largest bonus at 6%.  Although, now there is a 13% bonus product in CT with the approval of the Americo LibertyMark annuity. (Please Note:  The bonus is 15% in many other states).   The product comes with both a 7 year term as well as a 10 year term version.  This means that you would need to invest your money into the product for either 7 or 10 years before you could obtain the entire amount without a surrender charge.   In addition to the 13% bonus, LibertyMark has one of the stronger interest crediting methods available with a 2 year S & P annual point to point at 80% or 60% participation. This depends on the option that you select.

 LibertyMark

Structures their bonuses in a unique manner.  LibertyMark pays you the 13% bonus out at two different times.  When yo make your initial deposit you will receive a credit of a 5% bonus.  This means that the remaining 8% is credited at the end of year 10 on the total accumulation value of the product.  As an example, assume someone puts $100,000 in the product and it grows to $180,000 at the end of year 10.  The 8% bonus would be based off the $180,000 which would equal a bonus of $14,400.00  As with all fixed annuities, the principal investment is protected.   This means that the return in a given year can not go below 0% even if the market is down.

Please contact us if you have questions or would like to learn more.  You can either call our office at 203-796-5403 or email us at Edward@croweandassociates.com.  We are here to help you with all your insurance or investment needs.

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Income Annuity Information

We have provided you with some Income Annuity Information in this post.  The term “Income Annuity” is a catch all.  We use this term for any annuity that produces guaranteed future income.  There are three types of annuities that can create guaranteed future income.  These annuities are either a SPIA (Single Premium Immediate Annuity), a deferred income annuity or an annuity (fixed indexed or Variable) with an income rider.  All three have different sweet spots which can help someone determine when to use each type.  A review of each is provided below.

• SPIA-

•   A single premium deferred annuity creates immediate income that will last for a pre defined amount of time.   You can use the annuities to provide income for one person for life, or a couple for both lives.  Although, you can also use it for a set amount of time such as 20 years.   The biggest thing to be aware of is that the insured no longer owns the lump sum.  The insurance company and/or bank takes control of the lump sum of money.  They take the money in return for paying a guaranteed income stream that will not change.   If someone puts $300,000 in a SPIA with a life with 20 years certain option, this will guarantee payment for life.  In the event that the investor dies prior to receiving payment for  the 20 years, the beneficiary will receive the income until they have received the total 20 years of payments.   The trade off is that the insured no longer has access to the lump sum of money.

• WHY WOULD SOMEONE USE THIS?-

•  A SPIA will pay out the higher ratio of guaranteed income than the income rider or the deferred income annuity.  This is most useful for someone that has other assets and can afford to dedicate a portion of assets to create a guaranteed income stream.  The lump sum is no longer available so it is important to have other liquid assets if you decide to use this option.

• Deferred Income Annuity-

• The product is very similar to a SPIA. The difference is that income does not start immediately.  It starts at a pre determined future date.  The longer the deferral the higher the future income payment is.  You can calculate payments on a guaranteed bases.  The insured will know exactly how much they will get at that future date.

• WHY WOULD SOMEONE USE THIS?-

• If the insured has a need for future income, this is a good way to create an income stream without having to worry about market performance or  anything else.  They just dedicate the amount of money they need and then they can be sure income will start when it is necessary.  The flaw is that the future  income payout is not competitive with the future income payout that some other riders create.

• INCOME RIDER-

• When an income rider is attached to a fixed indexed annuity or a variable annuity it allows the insured to create a future income at any year they choose.  They do not need to pre determine the year income will be taken and they can see exactly what the income would be in any given year.  They also maintain control over the lump sum investment and can continue to accrue interest on the money.  The income payout exceeds that paid by the Deferred Income Annuity.  It is critical however, that you pick the most competitive company, as the guaranteed payout amounts vary tremendously.  This depends on the company that you choose to  use.  Additionally, there is an annual fee on most income riders.

• WHY WOULD SOMEONE USE THIS?

• If someone is looking for the highest deferred guaranteed income payment, the right income rider is the best option.  In fact, you would also maintain control of the lump sum investment if you use this approach.

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Risk Free Investments

In this post we explain some things about Risk Free Investments.  There are a number of risk free investments (no risk to principal) available to those looking for safe/conservative ways to earn interest on investments.  While it is smart to be conservative when approaching retirement or in retirement, it can be difficult to keep up with inflation only using strategies without market risk.  Money markets, CD’s and Annuities are three popular choices of focus in this post.

Money Markets

While Money Markets are safe and a convenient place to keep cash, they are simply not going to yield any type of meaningful return.

Certificates of Deposit

While better than a Money Market return, CD’s are still averaging less than 2% on a 5 year commitment nationally.  They are certainly safe but will not be likely to keep pace with inflation.  Market Linked CD’s may be a better choice for someone that is looking for the FDIC backing provided by CD’s.  Market linked CD’s provide principal protection but have a variable return that can range from 0% up to 8% or 9% depending on the terms and bank.

There are a number of different crediting strategies used but one of the more common ones is the “Basket of Stocks” approach.  The bank picks out a group of stocks (usually between 5 and 15).  If the overall portfolio is level or positive for the year, you will pay the stated/declared interest rate.  If there is an 8% interest rate declared, that is the amount you would pay for that year.  They repeat this process for the duration of the commitment.  If an 8% declared rate product is on a 7 year surrender schedule, the client will receive 8% for every year the account is positive.  They will receive 0% for years it is negative.   As a result, Market CD’s can be a good approach for the more conservative investor.

Annuities-

Annuities can be a good approach but you must do a great deal of research before you purchase one. There is a big difference between a SPIA, a Fixed annuity and an Indexed Annuity.   A fixed annuity (Also called a MYGA) can offer slightly higher rates than CD’s with the same term years. As of this post, the best 5 year fixed annuity is at 3.4%.

A SPIA (single premium immediate annuity) 

This product is based on your income and is not appropriate for any type of accumulation. Fixed Indexed Annuities can be a great option for account growth.  Although, they can also be a poor choice  this depends on which company and product you choose.  Fixed Indexed Annuities use market indexes (usually the S & P 500) to determine the amount of interest to credit to accounts.

They have crediting methods that provide a portion of the index growth to the account.  This is where there can be a wild difference in companies.  As an example:  One carrier currently credits the gain in the S & P 500 per year up to  a cap which is currently at 2.75%.  This means the most a client can get in a year is 2.75% return regardless of how high the market goes.  There is another carrier that credits 75% of the gain of the S & P over a 2 year period.  This would have provided over 22% interest  to an account in the 2012 to 2013 time period.   Obviously, it is important to choose the plan with the best crediting methods.  Because if you choose the wrong one it can cost a bundle.

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Is An Annuity Income Rider A Good Deal?

Is an annuity income rider a  good deal?  Annuity income riders are available on both fixed and variable annuities.  Although most people do not understand them very well, income riders are not that complicated.  Although companies have different bells and whistles on them, income riders are all very similar regardless of the company offering them.

The basic concept of an income rider is that they are a product investors use to create a future income stream.  Investors can determine their income down to the dollar at any future date.  This makes them very predictable.  An example is the best way to describe an income rider.

(Example)-

A person decides they would like to have a future income stream to supplement their retirement income they receive from Social Security and a pension.  They decide they have $250,000 that they can dedicate to future income.

The investor puts $250,000 into an income rider.  The income rider will show them exactly how much lifetime income they will be able to take in the future.  They can choose to start collecting income in any year they would like.   Although, once they start collecting income, the amount they receive every month will never increase.   The income will payout for life but their initial investment will erode over time.  When the $250,000 runs out they will still have the income payment however.

The positives of an income rider are the following…..

• Can predict future income right down to the exact dollar in any given year.
• This income has a guaranteed payment. The longer you wait to turn it on the more it will pay out for life.
• Market conditions have absolutely no effect on the deferred income increase on the rider.
• You will still have access to the lump sum investment even after you start to receive income payments.

The negatives of an income rider are…..

• Once you start to take payments your account will never increase.
• There is an annual fee for the income rider which your provider deducts from the account value (The $250,000 in the example) of the investment.
• The account value will steadily decrease  for every year the income rider pays you.

Income riders can be very useful if they are used for the right purposes (Generating future guaranteed income).  They can also be a terrible investment if used for the wrong reasons.  Many will argue that a larger future income stream can be created using other methods but they can not do it on a 100% guaranteed basis like an income rider can.

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Annexus BCA Annuity

The Annexus BCA annuity is a fixed indexed annuity.  This is a specialized offering from Aviva.  Unlike a traditional fixed annuity that offers a fixed interest rate for a set number of years.  The Annexus product uses an interest strategy based on performance of the S & P 500 while it still provides a 100% principal guarantee.

The idea behind the Annexus product is that it provides  an opportunity for superior returns compared to either a bank CD or fixed annuity while it still provides a guarantee against loss.

It attempts to accomplish this with a unique interest strategy. The following description intends to give clients a general understanding of the product.  Returns are based on the S & P 500 using a 2 year point to point strategy.  The gain in the S & P over a 2 year period is used to determine the return provided to the client.  After 2 years, the point to point is reset and another 2 year term will begin.

Not all of the return is provided however.  40% of the funds that clients place in the account are in a fixed account that yields a declared interest rate.  This leaves 60% of the money in the S & P.  Some of that gain has a further depression because of the annual spread. “Annual Spread” is an amount of the overall return the company keeps prior to giving the reminder to the client.  The spread ranges from 1% to 2% this amount depends when  the client purchases the product.

Given the above details:

The Annexus product is certainly going to lag behind the standard S & P return.  The fact that it will allow no less than a 0% interest credit in a negative 2 year cycle helps the performance of this product.  The bottom line is that the product certainly does protect against poor market timing with the 0% floor but it will also provide lower returns than the S & P in positive years.

An example of returns from the Annexus product vs. the S & P 500 is provided here. Annexus BCA 12 Annuity

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Please contact us if you have any questions about either investments or insurance.  You can reach us either by phone at (203)796-5403 or by email at admin@croweandassociates.com.

Bank CD Compared To Fixed Annuity

How is a bank CD different from a fixed annuity?  In this post we will talk about Bank CD Compared To Fixed Annuity.  They are more similar than you may think.  Here is a review of similarities and differences.

• Both CD’s and Fixed annuities offer a fixed interest rate for a set number of years. Terms such as 2, 3,5,7 and 10 years are common for both.   CD will provide shorter terms than an annuity as most fixed annuities will not offer a term less than 1 year.
• Interest rates have a guarantee for the full term on both products.  Once the investor reaches the term, they  may take the money out without any other obligation
• Fixed annuities tend to have larger penalties for taking the money out early.  While a CD will often just take the interest you gain as a penalty for early termination (taking money before term is over).   Fixed Annuities tend to charge penalties above just the interest you gain.   Both however are free of any penalties if the investor meets the full term.
• Most annuities will allow investors to take out 10% of the account value penalty free, per year, before the end of the investment’s term.
• Bank CD’s are FDIC insured, while Fixed Annuities are not.  Instead annuities are backed by the Guarantee Association of the state of issue.
• In general, a fixed annuity will offer a higher fixed return than a CD.  For example, the best current (As of April 3rd, 2014) 5 year fixed annuity rate is 3.2% for 5 years vs. the highest posted CD rate of 2.27% (Bankrate.com)

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Crowe and Associates is here to help you with all of your investment needs.  If you have questions, please either call us at (203)796-5403 or email us at edward@croweandassociates.com.  Also, feel free to ask us about insurance coverage.