What is an Annuity?

An annuity is a contract between you and a 3rd party insurance company, whereby in exchange for making a lump sum or systematic payments, the insurance company promises to do four things:

     1. Provide for accumulation, or asset growth, tax deferred

     2. Provide an income for a certain period of time, or for life

     3. Provide a death benefit, avoiding probate

     4. Provide for long term care benefits

An Annuity can be a part of your total retirement strategy, in that you can purchase one with a lump sum or regular premium payments over time. Annuity assets grow tax-deferred, and interest is compounded. When you begin making withdrawals or receiving payouts, you will only pay taxes on the interest earned if you paid for the annuity with after-tax dollars.

Fixed Annuities

The key feature of a fixed annuity is that the principal is FIXED – It is guaranteed by the insurance company. Gains are usually locked in each year, and you can mix and match different types of annuities to create a guaranteed income stream in retirement that is not influenced by interest rates, market fluctuations, or other typical market influences.

Multi-Year Guarantee Annuity is a term used to describe a fixed annuity that has an interest rate guarantee for the same period of time as its surrender period. For example, an annuity with a guaranteed interest rate of 5% per year for five years, where there are no surrender penalties after five years.

Fixed Indexed Annuities

Fixed indexed annuities, are a type of deferred annuity that credits interest based on the changes to a market index, such as the S&P 500 or Dow Jones Industrial Average. Interest is credited when the index value increases, but the interest rate is guaranteed never to be less than zero, even if the market goes down. Your principal, as well as all previously credited interest earnings, can never be lost and are always protected from any unforeseen downturn in the market.

This is what makes these annuity products so attractive to retired persons and to those approaching retirement who can’t afford, and don’t have time to recover from, a major blow to the value of their investment portfolios. In exchange for having their retirement assets fully protected from loss, an Equity Indexed Annuity owner receives interest credits based on a share of the market index gains without realizing 100% of those gains. For most individual investors who have recently been stung by market volatility, this constitutes a prudent and desirable trade-off.

Immediate Annuities

In an immediate annuity, the investor begins to receive payments immediately upon investing or at a predetermined date in the future. This is for investors who need immediate income from their annuity. When you purchase an immediate annuity, you can choose between payments for a certain period of time (typically five to twenty years – “period certain”), payments for the rest of your life or your spouse’s life, or any combination of the two. You can even choose between a fixed payment that doesn’t vary or a variable payment that is based on market performance. In almost every case, once you purchase an immediate annuity it is an irrevocable decision between you and the insurance company and cannot be voided. If you fund your immediate annuity with after-tax dollars, each payment you receive will be part return of principal and part interest, so a portion of each payment will not be taxable

Fixed Annuity Break Down

Variable Annuities

A variable annuity is a contract between you and an insurance company. When you open a variable annuity, the insurance company invests your money in a selection of mutual fund-like investments (called “sub-accounts”). Your account value can grow or shrink with the underlying investments, just like with a mutual fund.

Base annuity contracts have an annual fee, called ME&A fees. This stands for Mortality, Expense, and Administrative fees. The industry average for M&E fees is about 1.25%, whereas 1.65% is high and anything below 1% is considered to be low. The industry average for Administrative fees is 0.15%. In sum, ME%A fees vary depending on the contract and features, but should not exceed 2% of the account value.

Inherited Non-Qualified Annuities

Inherited Non-Qualified 1035 Tax Free Exchange of an Annuity 
When an owner of an annuity contract passes away the beneficiaries will inherit the money, and have choices on how they will receive that money. If the beneficiary does not need to use the money currently, they may do an Inherited Non- Qualified Tax Free Exchange to another annuity in there name. If the money is distributed the wrong way the interest or gain on the annuity will be 100% taxable to the beneficiary as ordinary income. 


Many people and financial advisors are not aware of or don't understand the rules of an Inherited Tax Free Exchange for beneficiaries. Families, business owners, and wealthy individuals have accumulated significant amounts of money in annuities, and all the built up interest has avoided taxation . This valuable rule lets the beneficiary avoid what could be a huge tax and roll or exchange the money over to a new annuity in there name that is more suitable for there financial needs without paying taxes. For the new owner there are minimum distribution rules for the years after, following the requirements of the Internal Revenue Code Section 72(S). 


There are Inherited Qualified (IRA) Tax Free Exchanges of an Annuity also.