Annuities Vs. CDs
Annuities and CDs (bank certificates of deposit) are similar in that they are safe, secure investments with guaranteed rate of returns based on interest rates, both issued by large financial institutions, CDs issued by banks, Annuities offered by insurance companies, but they both possess inherent differences as well.
The big differences are that while Annuities offer everything CDs offer, they carry several advantages.
1.Generally Higher returns 2.Tax-Deferral 3.Liquidity
CDs do have FDIC protection to guard against Bank or banking industry failure, but Annuities also have safety measures put in place by the state to ensure Insurance companies have reserve pools in place. Insurance companies may also be vetted for financial strength by obtaining their rating from objective rating firms -- Standard & Poor's, Moody's, A.M. Best or Duff & Phelps . The more solid the rating usually equates to a more solid financial backbone of Insurance Company.
Annuities, like CDs, are hinged to interest rates. But when rates are low so are CD returns whereas annuities have a minimum guarantee in place, usually 3% or 4%. Your investment will never dip below the guaranteed minimum interest rate during times of falling or low interest rates.
Again, low interest rates mean CD returns will be low as well. To offset the problem of low or falling interest rates, insurance companies equip annuities with guaranteed minimums. This is an agreed minimum rate of interest so that your investment is assured not to fall below the minimum performance even if CD rates do.
You pay annual taxes on CD interest earned without being able to withdraw funds until your investment term is over. With annuities, there is also a set term, but the earnings are tax-deferred. You only pay taxes on interest earned when money is withdrawn. So with annuities the deferred tax on your interest remains in the investment earning you more and more money, instead of being paid out to state and federal tax agencies on a yearly basis.
CDs do not allow you to withdraw any monies during term. Period. Annuities have provisions that allow you to withdraw money, generally 10% of your account value annually plus many contracts allow you to remove the earned interest on a monthly basis. Several other contract provisions allow you access to all of your funds such as in the event you are hospitalized, undergoing a life-threatening illness, subjected to a permanent or extended stay in a nursing home, or other major calamities that affect you economically. In addition, annuities can be structured to pay-out for the life of the owner over a fixed term such as five or ten years, thereby spreading out your tax-burden and providing enhanced income security. In short, Annuities offer enhanced flexibility.
Bank CD Annuity Loan privileges No YES Flexible premium No YES Avoidance of probate costs and delays No YES Withdraw for dollar-cost-averaging opportunities No YES Withdraw for required minimum distributions, penalty freeNo YES Potential Social Security tax advantage No YES Nursing Home Benefit No YES "Issue no money" capability No YES Bonus available on premium No YES Guaranteed lifetime income option No YES Potentially high yields No YES Tax-deferred Growth No YES
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What is an Annuity?
With an immediate annuity, you deposit a sum of cash today in exchange for a fixed stream of regular payments to you; either immediatly, or at a deferred date. Your income payments start right away (technically, anytime within 12 months of purchase). You choose whether you want income guaranteed for a specific number of years or for your lifetime. The insurance company calculates the amount of each income payment based on your purchase amount and your life expectancy.
A deferred annuity has two phases: the accumulation phase, where you let your money grow for a while, and the payout phase. During accumulation, your money grows tax-deferred until you take it out, either as a lump sum or as a series of payments. You decide when to take income from your annuity and therefore, when to pay the taxes. Gaining increased control over your taxes is one of the key benefits of annuities.
The payout phase begins when you decide to take income from your annuity. For most people, this is during retirement. As your needs dictate, you can take partial withdrawals, completely cash-out (surrender) your annuity, or convert your deferred annuity into a stream of income payments (annuitization). This last option is essentially the same as buying an immediate annuity
A Fixed Indexed Annuity is a wonderful stream of income for you that offers guarantees, tax advantages, and a residual income that you cannot outlive.
Although you have heard many say that Annuities are bad investments, you must understand that they are referring to Variable Annuities, not Fixed Index Annuities. Variable Annuities are indeed a poor investment choice because of their volatility, lack of security, tax repercussions, and other factors.
Fixed Annuities are just the opposite. Consider these facts:
•No Index Annuity owner has ever lost a dime due to market downturn. •No index Annuity owner has ever lost a dime because the carrier failed. •In the last year alone, Index Annuities have delivered 3 to 8 times the return CD’s (click here to see our Fixed Annuity vs CD comparison). •Unlike bonds, Index Annuities do not lose value when interest rates rise. •Index Annuities offer tax deferred without penalty of withdrawl •Index Annuities are guaranteed by the Insurance carrier and the state regulated Guaranty Fund.
Therefore, the basic benefits of Fixed Indexed Annuities are:
•Safety & Guarantee of Principle •The Power of Tax Deferral •Guaranteed Lifetime Income •Preservation of Premium •Market Based Risk-Free Asset Growth •Probate Avoidance Potential
Call us today and let us introduce you to The Compass Program, your best guide for re-directing your retirement security.