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ANNUITY BASICS

What are the different types of annuities?

The large number of annuity products on the market today can make understanding them difficult. But in fact, there are only a handful of different types of annuities, and we will help you find the best types to suit your needs. First, let’s discuss the three primary considerations when thinking about annuities:

Timing of payout -- immediate or deferred:

The first thing to determine is if you need an immediate or deferred annuity. Read on to learn the difference.

Immediate Annuities
In an immediate annuity, the investor begins to receive payments immediately upon investing. This is for investors that need immediate income from their annuity. When you purchase an immediate annuity you can choose between payments for a certain period of time (typically five to twenty years – “period certain”), payments for the rest of your life and/or your spouse’s life, or any combination of the two. You can even choose between a fixed payment that doesn’t vary or a variable payment that is based on market performance.

Deferred Annuities
In a deferred annuity, you typically receive payments starting at some future date, usually at retirement. However, most deferred annuities allow for systematic withdrawal payments beginning thirty days after the purchase of your annuity, up to 10% per year, in most cases. With a deferred annuity you can invest either a lump sum all at once, or make periodic payments, either fixed or variable. Those funds grow tax-deferred until you’re ready to begin receiving payments. Deferred annuities make up a large majority of all annuity sales in the United States, and are the type of annuity that we generally recommend if you do not need immediate income from your annuity.

Investment type -- fixed or variable:

The next decision to make is the investment type best suited to your needs: fixed or variable.

Fixed Annuities
Fixed annuities are invested primarily in government securities and high-grade corporate bonds. They offer a guaranteed rate of return, typically over a period of one to fifteen years. There are two basic types of fixed annuities:

The Guaranteed Return Annuities (GRA) is a fixed annuity that offers a guarantee that you can never receive less than 100% of your investment -- no penalties or fluctuations in the interest rate market can impact your principal should you surrender.

The Market Value Adjustment annuity (MVA) works much like the GRA, but there is no guarantee of your principal if rates rise and you surrender your contract. MVAs work like a bond and often pay more than a GRA due to the increased short-term risk of rising rates. It is important to note that, unlike a variable annuity, where your funds are held separately from the insurance company, with a fixed annuity your assets are part of the general accounts of the insurer, and are subject to the claims-paying ability of the issuing company.

For this reason it is important to understand the financial strength of the issuing insurance company before you buy a fixed annuity.


Liquidity options:

Finally, you will need to determine which liquidity option best suits your needs: those with or without withdrawal penalties.

Annuities with Withdrawal Penalties“No-surrender” annuities allow you to withdraw either your interest earnings or up to 15% per year without a penalty (although any withdrawal from an annuity may be subject to taxes and a 10% federal penalty if taken prior to 59½ years of age).

Beyond that, most annuities have a surrender charge -- a penalty for making an early withdrawal above the free withdrawal amount. Typically this surrender charge decreases over a seven-year period.

Why would you choose an annuity with a withdrawal penalty? Well, some annuities with surrender charges reward the investor by offering a “bonus”: the insurance company adds on average 3% to 5% to the amount of your principal. For example, if you invest $10,000 in a bonus annuity the insurance company will add $300 to $500 to you annuity immediately. The trade-off is that with a bonus annuity the surrender period is usually longer (eight to nine years in most cases versus the typical seven-year surrender). Be aware, some insurance companies charge higher fees on their bonus annuities, as compared with their standard products. Be certain to compare the annual fees of a bonus annuity to the standard or traditional (no-bonus with 7 years of surrender) annuity. Sometimes the life insurance company will raise their fees to pay for the bonus.

Annuities without Withdrawal Penalties
For investors who may need spur-the-moment access to their money, there are annuities without surrender charges (no-surrender or level load annuities) -- these annuities have no penalty or charge for early withdrawal. (That said, even with a no-surrender annuity investors under the age of 59 ½ are subject to a 10% federal excise tax as well as ordinary income taxes on any gains. You can avoid any taxes or penalties, however, by making a 1035 Tax-Free Exchange to another annuity, regardless of age.) No-surrender annuities do not come with bonuses, and some insurance companies charge higher fees for their no-surrender charge products, so be sure to compare all fees before you invest.

INDEX ANNUITY

The above chart is meant for illustration purposes
only and does not guarantee future results...

The Indexed Annuity did exactly what it was supposed to do... gave the Contract Owner the opportunity to accumulate value based on the appreciation of the S&P 500® Index, without the risk of loss of Premium in years when the S&P 500® was negative. All of this supported by a minimum Guarantee.

What is an Indexed Annuity?
While technically classified as a fixed annuity, an Indexed Annuity (IA) can be described as a hybrid of a fixed annuity and a variable annuity, having some characteristics of both, and falling in between regarding the potential for return and level of risk.

With a traditional fixed annuity, the annuity issuer guarantees both the rate of return and the payout. Investors in fixed annuities elect safety of principal and guaranteed returns over market risks and the potential for higher returns.

With a variable annuity, on the other hand, the rate of return varies according to the performance of the investments you choose from those offered by the issuer (these investments are often called subaccounts). With the exception of a guaranteed subaccount, variable annuities don't offer any guarantees on the performance of the subaccounts. You assume all the risk related to those investments including the risk that you may lose principal. In return for assuming a greater amount of risk, investors in variable annuities have a greater potential for growth in earnings.

Indexed Annuities take the middle ground, offering limited downside risk balanced by limited upside potential for returns. They offer safety of principal, and generally a minimum rate of return (provided the Indexed Annuity is held for the full term). Indexed Annuities also offer the potential for higher returns by tying interest paid to the performance of a stock index.

Note: Guarantees are subject to the claims-paying ability of the annuity issuer.


How do Indexed Annuities work?
As with fixed and variable annuities, an Indexed Annuity is a contract between you and an insurance company, in which you pay premiums and the issuer promises to make periodic payments to you in the future. You can pay premiums by making one lump-sum payment or by paying in installments over time. The periodic payments to you from the issuer can begin immediately (an immediate annuity) or be deferred (a deferred annuity) until a later date.

What makes Indexed Annuities unique is that they offer a minimum guaranteed interest rate (typically 3 percent), but allow for the possibility of higher earnings by linking the interest rate calculation to the performance of an equity index. Interest is calculated using a formula based on changes in the index. The terms of the Indexed Annuity contract dictate how interest is calculated and when it is credited.

Tip: An index tracks the performance of a specific group of stocks or bonds in a specific segment of the market or in the entire market. Some well-known indexes include the New York Stock Exchange Composite Index, S&P 500, American Stock Exchange Composite Index, and Dow Jones Industrial Average.

Caution: Unlike with variable annuities where the buyer's money is directly invested in the subaccount portfolios, buyers of Indexed Annuities are not directly invested in the index or the equities comprising the index. The index is merely the instrument used to measure the gain or loss in the market, and that measurement is used to calculate the interest rate.

Many variationsToday, there are many variations on the Indexed Annuity concept. Many new Indexed Annuity types have developed since the original Indexed Annuity was introduced. Each type has its own (sometimes subtly unique) features, all of which can affect your return. Key features (discussed in greater detail below) include:

• Term



• Interest Modifiers Such As



• Participation rate



• Interest rate cap



• Administration or asset fee (also known as margin or spread)



• Indexing method

It's important that you understand the individual features of an Indexed Annuity if you want to compare the returns among different Indexed Annuities, and choose the one that best meets your needs.

Key Indexed Annuities Features
TermThe term refers to the holding period or the period over which interest is calculated. Terms vary from one to several years. Some Indexed Annuities offer single terms while others offer multiple, consecutive terms. Some Indexed Annuities credit interest at the end of a term only.

With others, a percentage of the interest is vested or credited annually or periodically. Further, some Indexed Annuities pay simple interest while others pay compound interest. These features are important not only because they affect the amount of your return, but also because having interest vested or credited to your Indexed Annuity periodically instead of at the end of the term increases the likelihood that you'll receive at least some interest if you surrender your Indexed Annuity before maturity.

Tip: Multiple term Indexed Annuities usually allow you 30 days at the end of each term to withdraw your money without penalty.

Participation rate

The participation rate determines how much of the associated index's gain will be used to calculate the interest rate. For example, if the participation rate is 90 percent and the index the Indexed Annuity tracks increases 10 percent, the interest rate would be 9 percent (10 X .9 = 9).

Participation rates vary among Indexed Annuities, but rates of 70 percent to 90 percent are typical. You should consider the participation rate in light of other features offered by a particular Indexed Annuity; a lower or higher participation rate may be offset by other features.

Interest rate caps

The interest rate cap, or cap rate, is the maximum rate of interest the Indexed Annuity can earn. If in the above example the cap rate was 6.5 percent, the interest rate would be 6.5 percent, not 7.2 percent. Not all Indexed Annuities have interest rate caps, and again, you should consider any interest rate cap in light of other features offered by the Indexed Annuity.

Administration or asset fees (margin or spread)

Some Indexed Annuities have an administration or asset fee (sometimes called margin or spread) instead of, or in addition to, the participation rate. The administration fee is a percentage that is subtracted from the index's gain. For example, if the administration fee is 2 percent and the index increases 8 percent, the interest rate would be 6 percent (8 - 2 = 6). If there is also a participation rate of 90 percent, the interest rate would be 5.4 percent ([8 - 2] x .9 = 5.4).

Caution: Most Indexed Annuities count index gains from market price changes only and do not include dividends.

Caution: When considering an Indexed Annuity, you should note whether the issuer is allowed to change the participation rate, interest rate cap, and/or administration fee. A decrease in your participation rate or interest rate cap, or an increase in the administration fee could result in lower returns.

Indexing Methods

In generalThe indexing method is the approach used to measure the gain (or loss), or change, in an index.

The point-to-point methodThe point-to-point method compares the value of the index at the beginning of the term to its value at the end of the term, disregarding fluctuations in between.

This is the simplest method. With this method, interest may not be credited to your annuity until the end of the term. If you surrender your Indexed Annuity early, you may not receive any interest for that term.

Example(s):

John buys an Indexed Annuity linked to the S&P 500 that uses the point-to-point method. The term is seven years. On the date of issue, the index is at 1,000. On the maturity date, the index is at 1,100. A gain of 10 percent is realized ([1,100 - 1,000] ÷1,000 = .10).

Assuming a 90 percent participation rate and no other variables, John's Indexed Annuity earns a rate of interest of 9 percent (.10 x .9 = 9 percent), which is credited at maturity.

Annual reset methodThis method compares the index from the beginning to the end of each year. Interest is added to the value of your annuity at the end of each year. Once credited to your annuity, the interest is locked in. The beginning index value is reset at the end of each year, so future decreases do not affect the interest already earned. With this method, you are more likely to receive some interest in the event you surrender your Indexed Annuity early. However, you are also more likely to have a lower participation rate, and/or a participation rate that changes annually.

Example(s):

John buys a $100,000 Indexed Annuity linked to the S&P 500 that uses the annual reset method. The term is three years. On the date of issue, the index is at 1,000. The index on the Indexed Annuity’s first anniversary is 1,100. A gain of 10 percent is realized ([1,100 - 1,000] ÷ 1,000 = .10). Assuming a 90 percent participation rate and no other variables, John's Indexed Annuity earns a rate of interest of 9 percent (10 percent x .9 = 9 percent), which is credited at the end of the first year. At the beginning of Year 2, John's Indexed Annuity is valued at $109,000 ($100,000 + .9 ($100,000) = $109,000) and the index resets to 1,100. The index on the Indexed Annuity's second anniversary is 1,150. A gain of 4.5 percent is realized ([1,150 - 1,100] ÷ 1,100 = .045). Assuming a 90 percent participation rate and no other variables, John's Indexed Annuity earns a rate of interest of approximately 4 percent (4.5 percent x .9 = 4.05 percent), which is credited at the end of Year 2. At the beginning of Year 3, John's Indexed Annuity is valued at approximately $113,360 ($109,000 + .4 ($109,000) = $113,360) and the index resets to 1,150. At the end of Year 3, the maturity date, the index is at 1,050. No gain is realized (1,050 - 1,150 = 0 gain) and no interest is credited to John's Indexed Annuity. Over three years, John's Indexed Annuity has earned $13,360 or 13.36 percent.

Averaging method

The averaging method involves averaging several points of the index to establish the beginning and/or ending index value. For example, the index's value at the end of each month for 12 months may be added together and divided by 12. Averaging can protect you against sudden declines in the index, but may also reduce returns if the market increases.

Example(s):

John buys an Indexed Annuity linked to the S&P 500 that uses the averaging method. The term is seven years. On the date of issue, the index is at 1,000. The index on the Indexed Annuity’s anniversary date for the next six years is as follows: Year 1 = 1,050, Year 2 = 1,100, Year 3 = 1,050, Year 4 = 1,100, Year 5 = 1,150, Year 6 = 1,150, and on the seventh anniversary, at maturity, the index is at 1,150. The index's average over the seven-year term is 1107 ([1,050 + 1,100 + 1,050 + 1,100 + 1,150 + 1,150 + 1,150] ÷ 7 = 1107). The interest rate used will be 11.07 percent.

What are the advantages of Indexed Annuities?
Indexed Annuities offer the same benefits as traditional fixed annuities, including:

• Tax-deferred growth



• No annual contribution limits



• Guaranteed death benefits for beneficiaries



• No mandatory distributions after age 70½



• Option of guaranteed income for life through annuitization



• Limited penalty-free annual withdrawal potential



• Avoidance of probate

Indexed Annuities also offer other benefits, including:

• Safety of principal and guaranteed minimum returns (provided the Indexed Annuity is held for the full term).



• Combined with Potential for higher index-linked returns

Note:Guarantees are subject to the claims-paying ability of the issuer.

What are the disadvantages of Indexed Annuities?

Indexed Annuities generally have the same disadvantages as traditional fixed annuities, including:

• You pay premiums with after-tax dollars (a disadvantage when compared to deductible traditional IRA contributions and pretax contributions to employer-sponsored retirement plans)



• When withdrawn, earnings are taxed at ordinary income tax rates; lower capital gains tax rates won't apply



• Withdrawals made prior to age 59½ are generally subject to a 10 percent penalty tax



• Surrender fees charges in the early years of the annuity

Further, Indexed Annuities have these additional disadvantages:

• Participation in market increases is limited



• Feature variations can make comparisons among Indexed Annuities challenging

ARE YOU PLANNING???

Discover Index Annuities!

How would you like to have your invested assets tied to a barometer of the American Economy without any exposure to risk? Now you can.

Equity linked Indexed Annuities are here! The returns on your assets are linked to an outside source, the Standard and Poor’s 500 Stock Index. (S&P 500)
Plus this unbelievable feature….

No Loss Provision Possibly the most attractive provision of equity index annuities is the no-loss provision. No matter what happens to the American Economy, your funds are fully guaranteed to never lose money! Plus any gain recorded in the annuity (anniversary) now becomes fully locked in and those funds are also guaranteed to never lose value.

Competitive Rates of ReturnConcerns over inflation and making sure our future dollars are available to us for our retirement and other needs is essential. It becomes important to consider how the S&P 500 Stock Index has performed historically. Look at these returns over the past

20 years of the S&P 500 Stock Index
5 years average rate of return 9.23%
10 years average rate of return 8.18%
20 years average rate of return 15.7%

Source is Yahoo Finance.

In the last 20 years, 5 years have been down years and 15 have been up years.
Equity linked indexed annuities only participate in up years and are protected against loss on down years.

Traditional Annuity BenefitsEquity index annuities offer the same benefits as traditional annuities such as these features:

· Tax deferred growth
· Transfer directly to heirs without probate
· Access to your funds
· Conversion at anytime to an income of any period, even lifetime!

Auto-Pilot Investing
Indexed linked annuities are like having your funds on auto pilot. You only participate with the bulls (increase) and never hide with the bears(decreasing.)

“How would you feel about gambling if you went to Las Vegas and played blackjack. The situation is if you won a hand you got the money but if you lost to the house, you kept your bet, you didn’t lose. That is what indexed annuities, you only can increase and you have no exposure to loss.”

Overall, equity index annuities are single-premium annuities that are performance-linked to the S&P 500 Stock Index. They guarantee security of principal and credited interest, and many don’t have a cap on earnings. When you consider the performance of the S&P 500, these annuities look even better.

Read This:
Guarantees are provided by the issuing insurance company and are state specific. Each state regulates and approves contracts issued in that state. The Standard & Poor’s Composite Index of 500 stocks is generally considered representative of the U.S. stock market however actual performance of any index is not indicative of the performance of any particular investment.

Annuities Vs. CDs

Annuities and CDs (bank certificates of deposit) are similar in that they are safe, secure investments with guaranteed rate of returns based on interest rates, both issued by large financial institutions, CDs issued by banks, Annuities offered by insurance companies, but they both possess inherent differences as well. The big differences are that while Annuities offer everything CDs offer, they carry several advantages.

• Generally Higher returns
• Tax-Deferral
• Liquidity

CDs do have FDIC protection to guard against Bank or banking industry failure, but Annuities also have safety measures put in place by the state to ensure Insurance companies have reserve pools in place. Insurance companies may also be vetted for financial strength by obtaining their rating from objective rating firms -- Standard & Poor's, Moody's, A.M. Best or Duff & Phelps . The more solid the rating usually equates to a more solid financial backbone of Insurance Company.

Higher Returns:
Annuities, like CDs, are hinged to interest rates. But when rates are low so are CD returns whereas annuities have a minimum guarantee in place, usually 3% or 4%. Your investment will never dip below the guaranteed minimum interest rate during times of falling or low interest rates. Again, low interest rates mean CD returns will be low as well. To offset the problem of low or falling interest rates, insurance companies equip annuities with guaranteed minimums. This is an agreed minimum rate of interest so that your investment is assured not to fall below the minimum performance even if CD rates do.

Tax-Deferral:
You pay annual taxes on CD interest earned without being able to withdraw funds until your investment term is over. With annuities, there is also a set term, but the earnings are tax-deferred. You only pay taxes on interest earned when money is withdrawn. So with annuities the deferred tax on your interest remains in the investment earning you more and more money, instead of being paid out to state and federal tax agencies on a yearly basis.

Liquidity:
CDs do not allow you to withdraw any monies during term. Period. Annuities have provisions that allow you to withdraw money, generally 10% of your account value annually plus many contracts allow you to remove the earned interest on a monthly basis. Several other contract provisions allow you access to all of your funds such as in the event you are hospitalized, undergoing a life-threatening illness, subjected to a permanent or extended stay in a nursing home, or other major calamities that affect you economically. In addition, annuities can be structured to pay-out for the life of the owner over a fixed term such as five or ten years, thereby spreading out your tax-burden and providing enhanced income security. In short, Annuities offer enhanced flexibility.

Types of Investments...

The above chart is meant for illustration purposes

only and does not guarantee future results...