 | John Eck
is the owner of the ECK Agency, Inc., which is an independent insurance agency representing over 80 companies offering life, health, property & casualty insurance. Beginning his career in 1968, he is a Certified Insurance Counselor, a licensed Kansas insurance broker, and has held numerous positions with other related business ventures. Currently an active member of his local School Board, he has also held elected positions on the City Council and Hospital Board in past years. John can be reached at his office by phone at (800) 444-4911, or you may e-mail him at: eck@eckagency.com |
Insurance
2011-10-24 13:57:56
More about annuities
Q: I read your article last month. It was good but I would like to have more of the basics of annuities. Can you provide these?
A: I would be happy to do so. Over the years, these are some of the most frequent questions I have received.
Q: What is an annuity?
A: The word “annuity” means “an amount payable annually.” An annuity refers to a contract offered by insurance companies that allows an annuity buyer to save funds for retirement on a tax-favored basis and then choose to receive a guaranteed income, payable for life or for a certain period, such as five or 10 years.
Q: Who offers annuities?
A: Annuities are offered by insurance companies. Insurance companies are licensed to underwrite life insurance and annuities in the state in which an annuity buyer resides. Each insurance company is a qualified legal reserve life insurance company who is subject to financial requirements specifying the minimum reserves the company must maintain on its policies.
Q: Who sells the annuities?
A: Annuities are sold by licensed agents. Licensed life insurance agents, most financial planners and stock brokers can sell annuities.
Q: How does the law protect annuity investments?
A: In order to safeguard the funds of annuity contract holders or policy owners, state laws demand insurance companies meet strict financial requirements. According to these legal financial requirements, the insurance companies are legally bound to set up a reserve, which must be equal to the withdrawal or surrender value of their total block of annuity policies or contracts at all times i.e. insurance companies providing annuities must set aside funds equal to the surrender value of every annuity contract in force. Additionally, the state laws also require certain levels of capital and surplus to further protect the annuity holders or policy owners.
Q: How many types of annuities are there?
A: There are two classes of annuities: immediate annuities and deferred annuities. These two classes have various sub classes including fixed deferred, variable and equity-indexed annuities.
Q: What is an immediate annuity?
A: The annuity where the benefit payments begin very quickly, normally within one year of the time it is purchased is termed as an immediate annuity. An immediate annuity is commonly purchased with a single premium.
Q: What is deferred annuity?
A: Deferred annuity is where a policy holder pays a premium to the annuity providing the insurance company issues a contract promising to pay interest, or gains made on the deposit while deferring the income and the taxes until you actually withdraw the money or begin receiving an income. Three major types of deferred annuities are fixed deferred annuities, equity-indexed annuities and variable annuities.
Q: What is the death benefit on a fixed deferred annuity?
A: The death benefit on most fixed deferred annuities is equal to the full contract value, i.e. premium plus accrued interest compounded annually and credited daily minus any prior withdrawals, calculated as of the date of death.
Q: What is the death benefit on an equity-indexed annuity?
A: The death benefit on most equity-indexed annuities is equal to the full contract value, i.e. premium plus accrued gains compounded annually minus any prior withdrawals, calculated as of the date of death, or in some cases, as of the last contract anniversary.
Q: What are “qualified” and “nonqualified” annuities?
A: Qualified annuities are sold as part of a tax-qualified plan such as an IRA, Keogh, SEP, or company pension plan, and Nonqualified annuities are not used to fund a tax qualified plan such as an IRA, Keogh, SEP, SEP IRA, or TSA.
Q: What makes annuities different from other investments?
A: Their tax deferred status, the avoidance of probate, and the promise of guaranteed income for life make annuities different from other types of investments.
Q: What is tax deferred status of annuities?
A: The tax deferred status of annuities means that an annuity holder defers the income and the taxes until he/she actually withdraws the money or begins receiving an income.
Q: What is probate and why do people prefer avoiding it?
A: A probate is a judicial process to establish the validity of a will. The process of probate can delay the passing on of assets to heirs. Assets in an estate are subject to probate and can’t be passed on to heirs unless the probate court certify the validity of the will and authorize the executor to execute the will. People avoid probate because the judicial process can take anywhere between six and 12 months to conclude, and the legal expenses can be significant. Annuities and life insurance policies are not subject to probate and may be passed to a designated beneficiary directly without going through probate.
