Questions to ask an agent when considering an annuity purchase:

How long have you been selling annuities?

Which companies do you represent?

What are the terms and riders in the annuity I am purchasing?

Is the annuity full value at death?

What is the Minimum Guaranty of interest?

Do I have to annuitize the contract at the end of the surrender period to get all of my funds out?

Questions to ask yourself when considering an annuity purchase: It is important to have the answers to these questions when meeting with an agent on annuities.

Is the agent I am working with credible and do I trust them?

Am I concerned with Long Term Care costs or coverage?

Am I looking for index-oriented passive investment accumulations without market risk and with return of principle assured?

Do I own a CD or Fixed annuity but am looking for higher renewal rates…especially if I am no longer in a surrender charge period?

Do I own a bond fund and fear continued erosion of principle?

Have experienced substantial appreciation of stock or mutual fund shares and would now like to “lock in” gains, without giving up the potential for future equity-type growth?

Am I saving for retirement and would like to beat inflation, but not expose principle to risk?

Am I already a no-load investor and are open to new ideas?

Where do I put the money to keep it safe and ensure a lifetime of income?

Do I own a business?

Is the money I am using to purchase this annuity money I need to live on or money I am passing on to my heirs?

How much of my income will come from guaranteed sources such as Social Security and a pension and when will I begin to receive these benefits?

Do I need income now or at a later date?

How would a rise in inflation affect my future income?

Do I have any assets with potential to combat future inflation?

Would I feel more comfortable if I used a portion of my assets to provide guaranteed monthly income payments for the rest of my life?

Is retaining control of my assets important to me?

Which spouse will be retiring first?

What is my income plan for the surviving spouse?

How can my income plan change if your circumstances change?

Common questions and answers to your common annuity questions:

Q: How long will I have to own the annuity?

A: Annuities can be purchased for as little as 1 year and as long as 14 years.

Q: Will I be able to access the money I have in the annuity?

A: Typically you can withdrawal 10% of the total annuity value after the first year or the interest the annuity has earned without penalty.

Q: Will I have to pay taxes each year on my gains?

A: No, you will only have to pay taxes on your gains when you decide to cash out your annuity in full or take and income stream off the annuity.

Q: Which one should I buy?

A: There are several types of annuities available; all require a lump sum to start. It can be as low as $2,000. Depending on your goals, there will be a product to fit your needs. Chances are that you will be buying the common deferred annuity. A deferred annuity is to an insurance company as a CD is to a bank. With a deferred annuity you enjoy the benefits of tax-deferral, the avoidance of probate and guaranteed growth.

Equity Indexed Annuities and Fixed Deferred Annuities are one in the same. Each offers a guaranteed rate of return. No annuity, in the history of annuities, has ever lost client money. Equity indexed annuities offer you a way to reap the benefits of a bull market and none of the downside of a bear market.

If you are planning to go into a nursing home or apply for Medicaid and need to spend down your assets to get assistance, there is a way. The best part is that it is what Medicaid wants you to do!

This must be done prior to applying for the nursing home or applying for Medicaid.

First, you must own an annuity. If you have funds elsewhere you’ll need to put them into an annuity. If you own one now, you are in good shape.

What we will be doing is annuitizing the annuity on Medicaid Option D life expectancy tables. This accelerates the amount of money being paid to you each year. By doing this we turn the asset into income and do what the Medicare providers tell us to do. When you go into a home, you simply direct the payments to the home. You should now be able to get the maximum benefit provided by Medicare.

Spouses: Before going into a home and if the person going in owns the annuity we transfer ownership to the stay at home spouse. The stay at home spouse then annutizes based on Option D and receives income from the policy.

Single: You annuitze based on Option D and make the payments directly towards the care provider.

This can get complicated, so make sure to speak to an agent who has done this type of planning before.

If you live to age 65, chances are you will live well into your 80s.

We live in a health conscious society and the IRS has taken notice. Recently they have updated their rules for Required Minimum Distributions (RMDs) from Traditional IRAs and employer sponsored retirement accounts. The new rules are calculating RMDs using the latest life expectancy tables. This now gives IRA owners the ability to withdrawal less each year to reduce income taxes and stretch those savings as far as possible. Finally, the IRS is working for the benefit of taxpayers.

Starting at age 701/2 you will be required to take at least a minimum amount of money out of the policy and begin paying taxes on it. These distributions will continue until you have paid taxes on every dollar that you have never paid taxes on. The amount of money that is considered in RMDs comes from any gains that you have made on funds you have contributed to your IRA.

For example; when you started working you deposited $8,000 into your IRA. Over the next 40 years you have seen realized gains on that money. You now have an IRA balance of $56,000. You will be required to pay taxes on $48,000. %56,000 – the $8,000 you started with.

Don’t panic! You don’t have to pay the taxes all at once. That is why there are RMDs. It spreads your tax liability and payments out over your life expectancy.

Let’s take a look at how the scenario above would be “RMD’d”. You are in a 25% tax bracket. You owe taxes on $48,000. At age 70 your RMD factor is 27.4%. You take your $48,000 and divide it by 27.4%. This gives you a distribution of $1,751. You pay taxes on that $1,751 at 25%. Send the IRS a check for $437 and keep the rest.

Be sure to consult a tax professional about your situation.

The new wave of Indexed Annuities will be annuities with income riders. An income rider pays out a specified amount for the rest of the annuity owner’s life, but does not have all the stipulations of outright annuitization.

When you annuitize an annuity you receive a specified income for a specified period of time. The problem with annuitization is that you lose liquidity and control over those funds. You cannot change the amount of money you are paid; you cannot speed up the time or lengthen the time in which the payouts are received. In other words, while still receiving income, your hands are tied.

Income riders provide a way to regain liquidity and control over your funds and provide you with the income you need in retirement.

The beauty of income riders is that you can stop and start the income stream as you see fit. You can walk away from the policy when the surrender period has expired. You can lower the amount of income you need if you do not need it.

If you skim the interest off of a CD for income this is the type of product you will want to look into. Most have a spousal continuance feature that allows the surviving spouse to continue to receive a lifetime of income.

For example; you are 75 years old. You have $100,000 in a bank CD. That CD has been paying a rate of 5% per year. You skim off the interest each year for spending money. After taxes (assuming a 25% tax bracket) you get to keep around $3,750.

If you where to put that same $100,000 into an Indexed Annuity with an income rider you will receive an income of 6.5% per year. After taxes you will get to keep $4,870. The remainder of your $100k will be growing at a tax deferred rate. The greatest part is that what you take out gets flushed back in through interest crediting. Chances are you will never run out of money and be able to provide yourself and your spouse with a lifetime of income. Count on it!

Many people have difficulty understanding Annuities. One of the reasons may be that there are more than a couple of annuities you can purchase. Are you suitable for single or flexible-payment; fixed or variable; deferred or immediate? Whichever annuity contract you choose to buy, they are all designed to provide a source of retirement income for however long you would like. Whether it’s 5 years or a lifetime. This blog entry is designed to inform you about annuities in general. This is Part IV in an ongoing series where I will discuss the many options available to you.

Some Questions to Ask Before Buying

If you've decided that an annuity makes sense for you, here are a few key questions to ask yourself before signing up:

1. Have you done some comparison shopping and considered all of your options? Because annuities are long-term savings vehicles, you'll want to make sure the company you pick will be around at least as long as you will. And, as you learned in the previous discussion, different annuities offer a wide range of choices, prices, features and flexibility.

2. Does the rate on a fixed annuity look too good to be true? You want a competitive interest rate at renewal time. If the company is offering bonus rates (a higher interest rate for a set period of time) make sure the underlying interest rate and the company selling the annuity are financially viable. Once the bonus rate term expires, there is no guarantee going forward that renewal rates will be competitive. Be especially careful if you are exchanging annuities.

3. What are the annuity's surrender fees and how long are they in place? If the surrender fee is high (typical fees are around 6-7% and decline over a period of approximately five-to-seven years), you could feel locked into a contract from which it will be costly to escape.

4. What is the track record of the funding options offered in a variable annuity? Don't be swayed by last month's top performer. Look for strong returns over a three-to-five-year period or more. Newspapers such as Barron's and the Wall Street Journal – available in your local public library - publish rankings of various funding options on a regular basis. The history of various funding options also can be found in Morningstar and Lipper Analytical Services publications, available in larger libraries. Remember, past performance is not a guarantee of future results.

5. Does a variable annuity offer multiple funding options in case you change your investment strategy a few years down the road? Look for a range of funds to diversify your retirement savings as your needs change.

6. Will your ordinary income tax rate be greater than the current capital gains rate when you begin to take distributions (possibly at retirement)? If so, you may pay more in taxes by choosing annuities over another investment that would be taxed at the capital gains rate. Keep in mind, however, that your money in an annuity is accumulating on a tax-deferred basis. By selecting an annuity, you avoid paying yearly ordinary income tax on the earnings while your money compounds and grows.

7. What is the insurance company's rating? While anyone who is properly licensed to sell insurance products (e.g., banks, brokers, agents) can sell annuities, the annuity contract is issued by an insurance company. So, you'll want to consider the company's rating. Is it financially secure, with a good claims paying record? While this is most important for fixed annuities, it is relevant to any guarantees (e.g., death benefit) in a variable annuity as well. Checking up on an insurance company is easy at your local library, or you can contact your state's Department of Insurance. A.M. Best, Standard & Poor's and Moody's all rate the financial stability of insurance company general accounts. Morningstar and VARDs evaluate and report information on variable contracts only. Variable annuities are rated by independent sources such as Lipper Analytical Services, VARDs and Morningstar. It's a good idea to choose an annuity from a company that gets high marks from at least two independent rating sources.

Confused about Annuities? What you need to know before you buy: Part III.

Many people have difficulty understanding Annuities. One of the reasons may be that there are more than a couple of annuities you can purchase. Are you suitable for single or flexible-payment; fixed or variable; deferred or immediate? Whichever annuity contract you choose to buy, they are all designed to provide a source of retirement income for however long you would like. Whether it’s 5 years or a lifetime. This blog entry is designed to inform you about annuities in general. This is Part III in an ongoing series where I will discuss the many options available to you.

Why buy a Deferred Annuity?

Good question. There are a number of factors you must consider before making a deferred annuity part of your retirement planning.

#1: Do you want to postpone paying income taxes on interest earnings until you withdrawal your money? All earnings grow tax deferred until your withdrawals begin.

#2: How much money can I put in? Unlike IRA accounts there is no restriction on the amount you can contribute to your annuity. You can however fund your annuity with your current IRA, in which case you would be subject to IRS limitations. This does change the estate considerations of your IRA. When you die, your beneficiaries will receive the dollars avoiding probate. If a spouse inherits the annuity they can step in as the new owner and continue the policy or cash out. Upon cashing out the annuity there will be a taxable event.

Why buy an Immediate Annuity?

Before buying an immediate annuity, consider the following:

#1 An immediate annuity is a vehicle that can provide immediate income for any period you choose.

#2 The income you receive can supplement other income souces such as Social Security and pension payments.

#3 You choose how you want to receive the income. Whether monthly, quarterly, semi-annuialy or annually.

#4 You pay income taxes only as you receive your payments. When you receive income you will be taxed on the portion of payments that are earnings. The portion that is principal, which is the initial deposit has already been taxed.

#5 You may lessen your financial worries. Managing finances can be a burden, beings that it is hard to be sure income will last as long as you need it. If you take out too much of your nest egg, your future income can suffer or you can completely run out of money. If you are too thrifty, your level of living may suffer. If we use immediate annuities we can remove some of the uncertainty of income and improve a quality of life we should all enjoy in retirement.

Many people have difficulty understanding Annuities. One of the reasons may be that there are more than a couple of annuities you can purchase. Are you suitable for single or flexible-payment; fixed or variable; deferred or immediate? Whichever annuity contract you choose to buy, they are all designed to provide a source of retirement income for however long you would like, whether it’s 5 years or a lifetime. This blog entry is designed to inform you about annuities in general. This is Part II in an ongoing series where I will discuss the many options available to you.

Confused about Annuities? What you need to know before you buy: Part I.

Many people have difficulty understanding Annuities. One of the reasons may be that there are more than a couple of annuities you can purchase. Are you suitable for single or flexible-payment; fixed or variable; deferred or immediate? Whichever annuity contract you choose to buy, they are all designed to provide a source of retirement income for however long you would like. Whether it’s 5 years or a lifetime. This blog entry is designed to inform you about annuities in general. This will be the first entry in an ongoing series where I will discuss the many options available to you.

Singe vs. Flexible Annuities

You can purchase annuities in two ways:

Make one lump sum payment to purchase a single premium annuity. If you want to contribute more money at a later date you will have to purchase another annuity.

Make future contributions to a flexible payment annuity. You can contribute money at regular or irregular intervals anytime you want, similar to an IRA.

Fixed vs. Variable Annuities

There are two basic types of annuities you can; buy-fixed and variable.

Fixed Annuities

Fixed annuities earn a guaranteed rate of interest for a specific time period. Once that period is over, a new interest rate is set going forward. This guarantee of interest and principal makes fixed annuities similar to Certificates of Deposit (CDs) offered by a bank. However, an annuity is not backed by the FDIC. Rather, state guarantees set on a state by state basis. States guarantee between $100k and $300k to indemnify clients should the insurance company fold.

Variable Annuities

Variable annuities offer a range of funding or investment options. These funding options include stocks, bonds and money market vehicles. The return on variable annuities can go up and can go down. The principal and return you earn are not guaranteed. The returns are dependent upon the performance of the underlying investments. If the funding option performs well, you may exceed inflation or a fixed account option such as an annuity. They also provide an option of dividing your money between low risk guaranteed accounts and high risk such as those named before under one umbrella. Many variable annuities can provide the flexibility to re-allocate your money based on your risk tolerance. The downside being that there are no guarantees and you can lose money depending on your asset allocation.

Variable annuities also charge fees that are not applicable with fixed annuities. There are maintenance fees or contract fees that need to be taken into consideration before purchase. This is subject to company whims. Consider this; if your variable annuity loses money you are still subject to the fees in the contract. The fees never go away. This can detrimentally undermine your returns. Because these fees are determined by the carrier annually they can become complicated. They may charge an annual contract charge to cover admin expenses and surrender fees. These fees go to cover any contract guarantees entailed in said contract, a fund manager’s salary, printing, operating expenses, etc.

Before purchasing a variable annuity make sure to read the prospectus carefully and be sure to understand the underlying expenses.

Regulators and the financial press media have given EIAs a bad name. Why? Controversy has embroiled these products. Why?

Fact is EIAs can accomplish most of the goals of a Variable Annuity (VAs) and a Traditional Fixed Annuity (TFA) and be free of the problems inherent in both.

Variable annuity were created to provide retirement funds that cannot be outlived while protecting investors against the adverse effects of inflation to a portfolio; A portfolio of managed, diversified investments. Not long after their creation, federal regulators determined that VAs were little more than mutual funds with the slight trappings of insurance and were not exempt from federal registration and regulation. Even the Supreme Court agreed that VAs should be regulated by the SEC, state regulators and the NASD. Why so much heavy regulation on an Annuity product?

The Supreme Court decided to subject VAs to federal regulation was due to the fact that the entire investment risk in a VA is shifted from the insurer to the policy owner. Thus, determining that a VA was NOT the type of annuity Congress intended it to be thus exempting it from federal securities law. The result is the regulation that the product is subject to today.

By way of comparison, EIAs have the ability to provide consumers with the VAs two main advantages: a hedge against inflation and income for life. That being said, the EIA insurer guarantees the original deposit and a minimum investment return.

What does this mean? In an EIA the client transfers the risk of loss from their shoulders to an insurance company in return for a capped gain.

The mitigating factor in an EIA is the guarantee of credited interest results that intrinsically allows the EIA to avoid federal securities laws and is subjected only to the constraints of an atypical insurance product.

Recently, the NASD has caused undo concern regarding whether or not EIAs would continue to be insurance products rather than securities regulated investments.

The NASD position seems to be that registered representatives of broker-dealers that are members of the NASD should be supervised when selling EIAs, even though they are not securities and therefore not subject to NASD jurisdiction. A bit of a misnomer if you ask me.

The NASD will not formally say that EIAs are, per se, securities. This is probably because the NASD doesn’t have the power to challenge the SEC and the Supreme Court. The NASD really has no power to change regulation, they can however, stir the pot.

The NASD wants to see these product be sold through their distributions channels and thus subjecting the brokers to an “in house fee”, a cut of the sale’s commission to the house if you will.

If EIAs insurance products should be regulated and sold through Broker Dealers than why not all insurance products?

Although the SEC has had EIAs on their radar for quite some time, there has been no determination on whether to label the product ‘insurance’ or ‘security.’ This has been an ongoing controversy for years.

In fact, in the late 1980s the SEC published Rule 151 to clarify which annuities were securities and which were not. For the first time a safe harbor was created to protect EIAs that met the safe harbor definition. To qualify, an EIA must meet certain standards.

Despite this safe harbor, the courts and the SEC have long held that and product sold as an investment security, will be treated as one regardless of what in fact it is. EIAs are retirement products, not securities and should be bought and sold in this manner.

The emphasis of EIAs should be geared towards the guarantees in the product rather than the indexing feature used to credit returns.

Simply put, EIAs are not securities as determined by the SEC and the Supreme Court. They are not an investment, rather a retirement vehicle with a guarantee of a nominal rate of return and a lifetime of income GUARANTEED!

Attached to this blog is an article written in the Star Tribune by Tom Lauricella called “Annuities-Buying a Guaranteed Income.” (see bottom right of blog)

While some of his facts are true, I would like to take this opportunity to clarify some points and dispute others. Please read the attachment first and I will cover some of the misnomers.

First thing that most authors of these articles choose to do is lump Variable and Fixed or Fixed Indexed Annuities (FIAs) into the same category, cross referencing the products to pick and choose features that are convenient to criticize annuities. Often times leaving the reader with the assumption that they product and the way they are designed are one in the same.

While guaranteed income is provided in both contracts, Variable annuities charge a fee to carry the rider. Fixed annuities and FIAs have guaranteed income benefits with NO fees and are intrinsic to the policy(99% of the time).

FIAs are not as complex a product as some will have you believe. The way interest is credited has been boiled down to a handful of methods using a handful of barometers. Any producer pitching the products should be versed enough to explain these methods to a client. A good rule of thumb: FIAs are priced to return between 2-4% over the 10 yr. treasury over the life of a contract. If the 10 yr. treasury is at 4.80% today, you can expect a return between 6.80% and 8.80% during the life of the contract. These FIA policies are actuarially priced to offer those returns.

Living benefits in a Variable annuity can carry a fee. In a Fixed or FIA annuity there are no fees for living benefits. If such fees are present in a Fixed or FIA, it is a rare event and another product should be considered.

Why an annuity? The statement that “The fees for the insurance guarantees on annuities significantly detract from returns and your investment opportunities are limited.” is a serious misnomer. FIAs and Fixed annuities carry NO upfront or maintenance fees that should detract a buyer. Variables do. When buying a Variable annuity consider whether or not you would like to be in a mutual fund. If so, buy a Variable annuity. Fixed and FIAs offer you a way to transfer the risk associated with investing from your shoulders to an insurance companies shoulders. The guarantees in the contract do not carry fees and you cannot lose money in a Fixed or FIA. The transference of risk works like this; When you are in a mutual fund, stock or Variable annuity there is a chance you can lose money. There is also a chance that your gains can be great. Of course, with those great gains can come great losses. FIAs have been designed to give a buyer the guarantee they will never lose money, but the chances that your gains will be very high, i.e. 20%, are slim. So, if you can handle a gain of 7-9% over the life of the contract and never lose a penny, FIAs may be suitable for you.

A tax benefit of annuities could work like this. In your earning years you are in the highest tax bracket you will ever be in. Why pay taxes at the highest rate? If you defer taxes till retirement, chances are you will be in a lower tax bracket and pay a lesser amount of taxes on your deferred growth dollars. There are no fees attached to Fixed or FIAs hence you are not being penalized for tax deferral.

There are very few, if any products other than Annuities that can guarantee a lifetime of income benefits when paid out.

What happens if I need to take money out? Yes, if you fully surrender a FIA or Fixed annuity policy there will be a surrender charge applied. However, most annuities offer a combination or both of the following: Cumulative interest withdrawals at anytime or 10% of the total accumulated value at least once a year or anytime through interest withdrawals. You do have access to your money, but, if you need it all back at once there will be a penalty applied. This is a fact that must be accepted by transferring the risk from yourself to an insurance carrier. Look at these surrender charges as a “back-end load” on the policy. With FIAs there are no upfront or maintenance fees. The surrender charge is a fee that is only imposed if you choose to surrender the policy completely.

Can I accomplish the same goal outside of an annuity? By saying that the guarantees aren’t free is yet another misnomer. The only fee imposed is self imposed if you surrender a Fixed or FIA policy. In retirement, guarantees are everything. If a product guarantees that you will not lose money, and this is the money you will live on through retirement, I think that guarantees are everything. While bonds can be part of your portfolio, why limit yourself to a low rate when FIAs provide guarantees with the potential of a better return.

Can you show me similar annuities so I can see how they compare? Most independent producers can sell annuities from any carrier on the market that offers FIAs or Fixed annuities. Meaning, that through their support lines, they will be able to find the product that best suits your needs and goals. Albeit, if an agent is captive to an insurance company, i.e. a full affiliation, then they will be limited to the products they can recommend. I do agree that the financial strength of a carrier is very important. Most carriers on the market today have a rating of “A-“, or better, look for those carriers.

How much are you getting paid to sell this? Producers who sell FIAs or Fixed annuities are paid once for the sale. They are paid by the insurance company and not by their customers. They will not charge maintenance fees on the policy. It is a one time commissionable sale. Before questioning the validity of an agent’s commission consider that they will be servicing you and your policy for the life of the contract and get paid one time. If an agent will not tell you what his commission is I would not just walk away from a product that may be a perfect fit for you. While some insurance companies offer non-cash incentives, so do most industries and employers for meeting or exceeding sales goals. Why should an insurance agent not be rewarded for a job well done as anyone else in any other industry be rewarded for their hard work.

Why do I need to do this right now? A few questions to ask yourself: Is the renewal rate on a current policy sub-par to current rates? Do I feel like I have too much risk in my portfolio? Do I have a need for the income that the free withdrawals can provide? Would I like to take my investment risk off of my shoulders in return for slightly lower returns? Am I tired of paying fees on investments? If you can answer yes to most of these questions a Fixed or FIA may be for you.

If you are working with a trusted agent or estate planner, are they not currently and consistently acting in your best interest? Why would an annuity sale be any different?