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Understanding Annuities

Annuities are insurance contracts that may play a major role in funding your retirement. There are many different types of annuities, and it is important to understand them and how they work. Annuities are issued by insurance companies and are regulated by each state’s Insurance Commissioner.

Immediate Annuities — The simplest type of an annuity is an immediate annuity, which pays you a periodic payment for life. In exchange for a lump sum premium, the insurance company guarantees you an annuity payment every month (or every quarter) for the rest of your life. These payments continue as long as you (the annuitant) live. You cannot outlive the payments. However, the payments are fixed, so they will not increase with inflation.
Deferred Annuities — A deferred annuity does not make payments until you request them. You may deposit funds from time to time and allow the annuity value to grow. Many people use deferred annuities to save for retirement. During the accumulation phase, the principal grows tax-deferred. You pay income tax on the growth only when you begin take funds out of the annuity. This tax-deferred growth is an attractive feature of deferred annuities.
Investment Options — Many annuities are fixed annuities. This means that the growth rate of the funds in the annuity is guaranteed, at least for a certain number of years. Fixed annuities are guaranteed by the insurance company, which invests in low-risk investments. Another type of annuity is the variable annuity, which allows you to direct the investments into various sub-accounts, which may include investments in the stock market. The value of your annuity will depend on the performance of your investment choices.
Payout Options — Most annuities offer different payout options. One option is to annuitize. When you annuitize, you exchange the accumulated value for a guaranteed payment for life. If you annuitize, the principal is liquidated and there will be nothing left to leave your heirs. Another payout option is to simply withdraw funds from your annuity. When you make withdrawals, you can take just what you need, when you need it. This choice gives you flexibility, and it allows you to preserve some of the value to pass on to your heirs. Annuity payments are taxed differently than withdrawals, so please consult with your tax advisor before making your decision.
Your Contract — Make sure you are familiar with your annuity contract. Some annuities have special features, such as guaranteed death benefits. Many annuities also have surrender charges, which gradually decline as the contract gets older. Some features can only be exercised at the contract anniversary date. If you have trouble understanding your contract, please consult with your agent or call the insurance company.
Your Beneficiaries — You may name beneficiaries on your annuity, and you may change them anytime you wish. Please review your beneficiary designations periodically and keep them up-to-date. When family members inherit an annuity, they will have to pay income taxes on any growth. You may also arrange for your spouse to inherit your annuity and continue the tax-deferred growth. You may also name a charity as a beneficiary for all or part of your annuity. The charity will pay no tax on its share because it is tax-exempt.
Gift Annuity — A gift annuity is a special type of annuity that supports a charitable organization. With a gift annuity, you receive payments for life and the remainder goes to your favorite charity. Gift annuities are similar to other fixed-income annuities, but they also provide you with a charitable income tax deduction. For many people, a gift annuity is an excellent way to help themselves while helping their favorite charity.

If you have any questions, please contact your professional advisor, or give us a call.

Judy Ludin, Development Executive
Menorah Manor Foundation
255 59th Street North
St. Petersburg, FL 33710
Telephone: 727-302-3704

Email: foundation@menorahmanor.org