Fixed Annuity Basics. Ever Wonder If A Fixed Annuity Is Right For You? In this article we briefly review the following questions: What is an annuity

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1 Ever Wonder If A Fixed Annuity Is Right For You? In this article we briefly review the following questions: What is an annuity What types of annuities are available Whether or not an annuity may be right for YOU 1

2 Annuities... Offer better guarantees than other fixed interest products Provide a combination of safety and liquidity Provide tax-deferred interest Have no sales fees or charges (fixed annuities) Provide a choice of interest rate guarantees Avoid probate Guarantee principal protection Types of Annuities... There are various types of annuities in the financial industry today. So what are the main differences and is there one right for your financial plan? In this next section we give a brief overview of the different types of fixed annuities and how they work. Multiyear Guaranteed Annuities (MYGAs)... Specify a guaranteed interest rate for a specific time, often referred to as CD annuities. Starting from day 1, you will know what your account is worth at the end of the term, assuming you make no withdrawals or surrenders. These are most often compared to CDs at the local bank, but generally have higher interest rates, more guarantees and better liquidity features. Once the contract term is over the client has full freedom to access the funds free of charge, leave the funds in place and earn a current interest rate, transfer to a new annuity or turn the contract into an income stream. 2

3 Traditional (Bonus) Annuities... Typically have a higher first-year interest rate due to a bonus. After the first year, there is a guaranteed minimum interest rate that remains in effect for as long as the policy is in force. In addition, the company declares an annual rate of interest that may be in excess of the guaranteed rate. This allows for interest rates to rise if the current rate environment rises. The guaranteed minimum interest rate provides protection in event the rate environment falls. Once the contract term is over the client has full freedom to access the funds free of charge, leave the funds in place and earn a current interest rate, transfer to a new annuity or turn the contract into an income stream. Indexed Annuities (IAs)... Are a type of fixed (guaranteed) annuity. That s because indexed annuity values, like other fixed annuity values, are backed by a minimum guaranteed interest rate which is specified in the policy. Where IAs differ from traditional fixed annuities is the method of determining the interest rates. Instead of declaring a specific rate, as is done with traditional fixed annuities, the indexed annuity credits interest based on the change in value of a specified equity index, most commonly the S&P 500. If the index increases during a contract year, you earn interest based on the increase up to a limit, or cap. If the index falls during a contract year, the worst your annuity will do is a ZERO percent return. 3

4 IAs continued As a fixed annuity, you cannot lose value in your annuity due to poor market performance. In the worst-case scenario, over the life of your contract you will earn the minimum guaranteed interest rate if the market performs worse than the guarantee. Historically, the market has better performance over time versus traditional fixed/guaranteed products. IAs offer you a chance to participate in some of those gains while still protecting your conservative nature and avoiding short term market risk by using a guaranteed product. IAs were designed to provide interest returns that bridge the gap between lower interest rate fixed products and the volatile stock market which offers higher long-term returns. Review Most fixed annuities offer a free 10% withdrawal feature annually. This helps provide liquidity when emergencies arise. MYGAs are similar to CDs. They offer a fixed interest rate to conservative investors who need to know what their accounts are worth from the beginning. Bonus annuities offer a higher first year rate, then offer more flexibility to move with current interest rates as they change. These are for people who believe interest rates will rise and are willing to have a lower guarantee for a higher earning potential. IAs offer even more earning potential by using a stock market index to create interest, and still offer a guaranteed minimum return over the life of the contract. All offer varying levels of guarantees to your principal. The higher the earning potential, the lower the guarantees tend to be, but no negative risk. Depending on your earning needs, there is probably a contract that fits your financial profile. 4

5 How Do I Know If A Fixed Annuity Is Right For Me? The questions below may help you decide which type of annuity, if any, meets your retirement planning goals and financial needs. Each of your financial accounts should have a specific goal attributed to it. Much like life in general, if you don't have goals attached to your pools of money, they will probably bounce from account to account and never achieve what you would like them to achieve. You should think about your goals for the money you may put into an annuity. Do I want this pool of money at risk, where I may lose the principal? Have I already lost money in the stock market but have a long-term horizon that I should capitalize on? Do I want a guaranteed interest rate and no risk of losing the principal? Do I want guarantees and a chance to earn more as interest rates rise? Do annuities let me get money when I need it? Do I want the benefit of tax deferred growth on my money? Would I like this asset to skip the troubles of probate in case of my passing? Talk with day about the benefits a fixed annuity may have in your long-term financial plan! 5