Insurance companies sell annuities. The insurance industry is more highly regulated than any other industry except for the nuclear power industry. Whereas banks are typically around 8% capitalized, insurance companies are required to be over 100% capitalized. When an insurance company sells a $100,000 policy, it has the $100,000 available NOW. No one has ever lost money on a life insurance policy or an annuity in the United States.

THERE ARE IMMEDIATE AND DEFERRED ANNUITIES.

An Annuity is a contract in which an insurance company receives a client’s money and pays it out over time. With an immediate annuity, payments begin one year or one month after the annuity is set up. With a deferred annuity, payments begin after an agreed period of time, usually 3 to 10 years, during which the annuity grows in value.

I SELL ANNUITIES THROUGH HIGHLY RATED COMPANIES.

I sell annuities through several companies. My favorite deferred annuity is the Secure Index Seven Annuity from ING USA Annuity and Life Insurance.  A.M. Best rates ING USA Annuity and Life Insurance as A+ or superior. For a list of the various annuities ING offers, click here. Not all of these annuities are available in Washington. 

THERE ARE VARIABLE AND FIXED ANNUITIES.

A variable annuity is tied to an index and can go up or down in value. Variable annuities are as risky as mutual funds or a 401(k) tied to mutual funds. To sell variable annuities, an agent needs a securities license. I am not interested in selling variable annuities, although I will be getting my securities license soon, just to be better educated.

ANNUITIES CAN BE FIXED OR FIXED AND INDEXED.

A fixed annuity pays a fixed rate. The fixed rate can be fixed for the entire term of the annuity. Or the insurance company may reserve the right to adjust the fixed rate yearly. With a fixed indexed annuity, there is a minimum fixed return PLUS additional returns if the index the annuity is tied to rises. A fixed indexed annuity is variable, but it is variable only in one direction—up. 

ANNUITIES HAVE MANY INTEREST CREDITING METHODS.

Some of the crediting methods are: fixed, yearly point-to-point with a CAP, yearly point-to-point with no CAP but with a participation rate, monthly point-to-point with a cap, monthly average subject to a spread, and so on. I generally recommend the yearly point-to-point with a CAP.

CREDITING METHOD: FIXED CREDITING METHOD.

CREDITING METHOD: YEARLY POINT-TO-POINT INDEXED TO THE S&P 500 WITH A CAP:

You might link your money to the S&P 500. If you do, and if you select the yearly point-to-point strategy, there will be a floor of 0.00% if the S&P goes down and a CAP of 10.0%. If the S&P goes up 15.0%, your account value will only go up 10.0%. In good years you will earn less than the general market, but you will avoid the risk of possible loss. If your stock really did go down, you will still earn 3.0% under a 3.0% look-back guarantee.

CREDITING METHOD: MONTHLY POINT-TO-POINT WITH NO CAP BUT A PARTICIPATION RATES:

If you predict that the S&P 500 index will increase greatly in value in the coming year, you can elect to have no CAP, however, you will have to accept a participation rate of 53%, meaning that your account would rise only 53% of whatever the S&P gain might be. For example, if the S&P went up 30.0%, your fund would increase by 15.9%. If the S&P only climbed 10.0%, your gain would only be 5.3%.

CREDITING METHOD: MONTHLY AVERAGE SUBJECT TO A SPREAD:

To hedge your bets, you can divide your annuity money into various components, sometimes referred to inelegantly as “buckets,” each with its own crediting method, as outlined above. .

FIXED INDEXED ANNUITIES HAVE A PROTECTIVE LOOK-BACK GUARANTEE.

ANNUITIES HAVE SURRENDER CHARGES.

ING wants you to leave your money invested with ING for a substantial period of time so it can earn the money needed to pay you well. Up to 10% of money invested can be withdrawn each year with no penalty, but above that there are surrender charges which decline from 10.0% to 7.0% over the 7-year life of the annuity. These charges are waived if you are hospitalized or enter a nursing home for a certain time period or if you contract a terminal illness.

YOU CAN ADD PRINCIPAL TO YOUR ANNUITY.

If you want to add more money into your annuity, there is no penalty. Compare this with universal life insurance, where there is a limit on additional contributions.  

ANNUITIES GET SPECIAL TAX TREATMENT.

Unlike a savings account or a CD, annuities grow tax free. They are comparable to a 401(k) or IRA account. However, when the money is taken out, there is tax on the gain. If the money is taken out before age 59˝, there can be an IRS penalty.

A RETIREMENT ACCOUNT CAN BE ROLLED INTO AN ANNUITY

When a 401(k) or other retirement account is rolled into an annuity, there are no IRS penalties. This is generally done with retirement accounts left behind when you changed jobs, and especially with accounts that are performing poorly.

WHAT ASSURANCE DO YOU HAVE THAT ING WILL PAY A GOOD RETURN?

The annuity contract allows the insurance company to change the fixed rate each year. It can change the CAP. It can change the spread and the participation rate. What assurance do you have that ING will drop its payment levels after you buy in?

The answer is this: ING wants to pay the maximum amount it can pay so that you will stay with ING after your annuity matures and so others will want to invest with ING.

But ING has to have the capacity to limit payouts to protect the long term profitability of all annuities. And bear in mind first, that although ING can change CAPs, etc., it will not change its minimum look-back 3.0% guarantee, and second, that ING is one of the few companies that publishes what it has paid over time.

COMPARE AN ANNUITY WITH UNIVERSAL FIXED INDEXED LIFE INSURANCE:

Annuities are usually funded with pre-tax money, money that was in a 401(k) that was declining in value. Clients can generally buy annuities up to age 80. Clients do not have to pass a medical test to buy an annuity. Money invested into an annuity grows tax free, however, when it is taken out, there is tax on the gain. If the annuity is bought with pre-tax money, there can be a 10% penalty on monies removed from an annuity before age 59 1/2.