Golden Opportunities

Will an investment in annuities produce lots of green, or will it make you see red? Here to help us see the black, white and gray of annuities is our very colorful money maven and financial quarterback, Jim Lineweaver.

Question: Are annuities good investments, or rip-offs?

Answer: They can be good or bad, depending on your circumstances, your needs and the type of annuity. There are many different types of annuities, and there are considerable differences between the types. People consider buying an annuity and are sometimes not sure of the important details specific to the investment at which they are looking.

Question: What are the different types of annuities?

Answer: Most annuities that are purchased are a broad type of annuity called a deferred annuity. It is tax deferred in that there are no income tax consequences until money is actually withdrawn from the investment. This is different from a CD where your income is taxable on an annual basis. So if you don't pay much or any income tax, an annuity probably is not for you.
The decision on how and when you are going to withdraw money from the deferred annuity is made in the future. It usually involves a degree of flexibility on the owner's part as to the timing of withdrawals. Usually, an annuity will involve surrender charges if all of the money is withdrawn before a prescribed time period.
There are three main types of deferred annuities: fixed annuities, equity indexed annuities, and variable annuities.

Question: What are the features of a fixed annuity?

Answer: A fixed annuity usually pays a fixed interest rate for a specified period of time. It's a little like a CD. It helps to have an idea as to the direction interest rates are headed before making an investment of this type. e.g., if interest rates go up, you've locked yourself into a poor return.

Question: What about equity indexed annuities?

Answer: The second type of deferred annuity, equity indexed annuity, earns interest based on the movement of an underlying index of the stock market. It is not an investment in the stock market, but its interest earnings are tied to the returns in the stock market based on the movement of an underlying index like the Dow Jones Industrial Average or the S&P 500. The interest that is credited is usually limited based on what is called a cap. The cap determines the upper limit of the interest that can be credited. There are also participation rates, which determine what percentage of the underlying Index's gain you will receive, or participate in. There are many variations, and the differences can be significant. You need to understand the differences and how they will impact you in the future.

Question: Variable annuities — what are these?

Answer: A variable annuity is a tax-deferred account that holds mutual fund-like assets called sub-accounts. With a variable annuity, you will typically have 30-40 different investment options, (sub-accounts) available. The sub-accounts managers are typically the same managers that manage the large mutual funds.
The variable annuity has evolved over the years to provide owners with some protection against stock market losses. The first type of optional insurance that became available with variable annuities is a death benefit. It was intended to insure that the original investment would be guaranteed to be paid to the owner's family. Death benefit enhancements have been made that allow for a predetermined annual increase in the death benefit, or will lock in high account values as the death benefit.
These protections are fine for people whose primary concern is protecting assets for their heirs, but it doesn't provide protection for the owners themselves. Therefore, the insurance industry recognized the opportunity for further optional enhancements called living benefits. Living benefits are designed to afford some protection for the owner from a decline in their account value due to stock market losses. These optional guarantees usually required to withdraw the guaranteed amount over a number of years. These living benefits can provide some added peace of mind, but the owner needs to fully understand how they work and what they cost. Each of these optional riders have costs involved, which can hamper the vehicles overall returns.

Question: This all sounds very complicated.

Answer: As with any investment, you need to know the ins and outs. Most annuities require a time commitment, but do provide limited liquidity, possibly 10% per year. If more than that is withdrawn, there may be penalties called surrender charges that come into play. The IRS has given owners special tax-deferred status, but with that comes a penalty if funds are withdrawn prior to age 59.

Question: Where can our viewers learn more?

Answer: It is hard to go into a lot of detail in a short program; therefore, Lineweaver Financial Group has developed an educational program just about annuities. The purpose about this educational program is to inform the investing public about the different types of annuities, some of their positive and negative aspects, and how they may be appropriate in different circumstances.