- The word "annuities" comes from the word "annua" which is Latin for "contract." In Roman times, citizens would make lump sum payments to the Emperor's "annua" in exchange for lifetime annual payouts. In the 18th century, a Pennsylvania company introduced annuities to America by forming the first annuities group created specifically for ministers and their families. In 1912, The Pennsylvania Company for Insurance was the first American company to offer annuities to the general public.
- The most basic and popular types of annuities are the fixed, variable, indexed and nonqualified. Under fixed annuity contracts, companies typically promise consistent interest rates for a set time period after which the rate may go up or down according to the policy. Indexed annuities are fixed annuities that grow according to the rise or fall of market rates. Under variable annuities, the insurance company invests the money in different share accounts within the annuity. The value of the annuity then depends upon the performance of the accounts it holds. With nonqualified or "after-tax" annuities, the principal invested---which was taxed when earned---is only subject to taxes on the accrued interest when withdrawn. You can exchange older annuities for newer, better performing annuities without tax penalties.
- Along with tax-deferral benefits, annuities also offer flexible payout options that can spread over a lifetime, ensuring a steady income past retirement. Annuities also require no medical exam like regular life insurance does. Upon death of the owner, funds can bypass probate and pass immediately to beneficiaries. Unlike a 401(k) where the withdrawal age is 70, annuities can wait much longer and, unlike bonds and CDs, annuities do not offset income from Social Security. In addition, annuity owners can maintain tax control by waiting to withdraw money during years offering lower tax rates.
- With annuities, the money invested is only as secure as the financial strength of the seller company. There are no guarantees. Before purchasing an annuity, consider investment security risk factors, withdrawal taxes and penalities, and seller fees. Any annuity payout is considered income and taxed accordingly. In addition to taxes, there are typically added fees and charges set by the insurance company, such as early surrender fees, administrative fees, contract maintenance fees, and Mortality and Expense Risk (MER) charges.
- The term "tax-deferred" is not the same as "tax-free." Municipal bonds are considered "tax-free" because you pay no income tax on the gains. Annuities, on the other hand, are taxed on the gain but only when you withdraw the gain from the annuity, which is at your discretion.
