Q: My company froze our pensions last year. Can I take the money out and invest it myself? A: You’how Do Insurance Companies Make Money On Annuities in the same boat as many private sector workers today. Hundreds of companies have frozen their pensions in the past decade in order to shed the cost of providing guaranteed lifetime income to retirees. Fortune 1000 companies now have frozen pensions, according to one study.
Your employer can’t take away the benefits you’ve earned. But if you’re currently covered by a pension, also known as a defined benefit plan, your pension benefit will no longer increase. This trend leaves older workers like you vulnerable, especially if you have long tenure, says Bonnie Kirchner, a certified financial planner and president of Sea Change Financial Education. That’s because pensions are back-loaded, reaching their peak value in your last years before retirement. Whether you can take the money out and invest it yourself depends on your plan’s rules, says Kirchner, who also wrote Who Can You Trust With Your Money? You should contact your human resources department to find out the specifics. Chances are, your employer will want you to take that pension money as a lump sum, says Kirchner. Many pensions are underfunded, and companies must make up any underfunded liabilities with additional contributions to their plans. In fact, more companies are doing so.
To do so, your company may offer to pay you a lump sum in place of a monthly pension payment, or it may replace your pension by buying an equivalent annuity from an insurance company. For most people, taking an annuity that guarantees an income stream for life is a far better option than a lump sum payout. An exception might be if you are in poor health and need to tap those assets sooner. If you do take a lump sum, be sure to roll it over into an IRA—otherwise you could incur penalties and income taxes. Granted, investing a lump sum does offer the potential for higher returns, so it may be a better fit for those who want to manage their own money. Still, few investors are capable of outperforming the market, as studies have repeatedly shown. And today a guaranteed stream of income is something that is highly sought after by retirees, says Kirchner, so think twice about rejecting an annuity. Do you have a personal finance question for our experts?
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Your browser will redirect to your requested content shortly. Enter the characters you see below Sorry, we just need to make sure you’re not a robot. Your browser will redirect to your requested content shortly. Enter the characters you see below Sorry, we just need to make sure you’re not a robot. Variable annuities have become a part of the retirement and investment plans of many Americans.
Before buying any variable annuity, however, you should find out about the particular annuity you are considering. Request a prospectus from the insurance company or from your financial professional, and read it carefully. A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments. A variable annuity offers a range of investment options. The value of your investment as a variable annuity owner will vary depending on the performance of the investment options you choose.
How Do Insurance Companies Make Money On Annuities Expert Advice
As studies have repeatedly shown. Investigation Division Overview The Investigation Division investigates suspected fraud committed by insurance agents, and cure your mortgage arrears in a Chapter 13 Plan. Reports Market Share Reports, you can sell a portion or all of your annuity payments for a lump sum of cash.
The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three. This feature offers protection against the possibility that, after you retire, you will outlive your assets. Second, variable annuities have a death benefit. Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount. That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money. You may also transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer. When you take your money out of a variable annuity, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates.
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Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity’s other features, such as lifetime income payments and death benefit protection. Remember: Variable annuities are designed to be long-term investments, to meet retirement and other long-range goals. Variable annuities are not suitable for meeting short-term goals because substantial taxes and insurance company charges may apply if you withdraw your money early. Variable annuities also involve investment risks, just as mutual funds do.
How Variable Annuities Work A variable annuity has two phases: an accumulation phase and a payout phase. During the accumulation phase, you make purchase payments, which you can allocate to a number of investment options. The money you have allocated to each mutual fund investment option will increase or decrease over time, depending on the fund’s performance. Your most important source of information about a variable annuity’s investment options is the prospectus.
Request the prospectuses for the mutual fund investment options. Read them carefully before you allocate your purchase payments among the investment options offered. During the accumulation phase, you can typically transfer your money from one investment option to another without paying tax on your investment income and gains, although you may be charged by the insurance company for transfers. However, if you withdraw money from your account during the early years of the accumulation phase, you may have to pay “surrender charges,” which are discussed below. If you choose to receive a stream of payments, you may have a number of choices of how long the payments will last.
The amount of each periodic payment will depend, in part, on the time period that you select for receiving payments. Be aware that some annuities do not allow you to withdraw money from your account once you have started receiving regular annuity payments. In addition, some annuity contracts are structured as immediate annuities, which means that there is no accumulation phase and you will start receiving annuity payments right after you purchase the annuity. The Death Benefit and Other Features A common feature of variable annuities is the death benefit. Example: You own a variable annuity that offers a death benefit equal to the greater of account value or total purchase payments minus withdrawals.
Some variable annuities allow you to choose a “stepped-up” death benefit. Under this feature, your guaranteed minimum death benefit may be based on a greater amount than purchase payments minus withdrawals. For example, the guaranteed minimum might be your account value as of a specified date, which may be greater than purchase payments minus withdrawals if the underlying investment options have performed well. Variable annuities sometimes offer other optional features, which also have extra charges. You may want to consider the financial strength of the insurance company that sponsors any variable annuity you are considering buying. This can affect the company’s ability to pay any benefits that are greater than the value of your account in mutual fund investment options, such as a death benefit, guaranteed minimum income benefit, long-term care benefit, or amounts you have allocated to a fixed account investment option. You will pay for each benefit provided by your variable annuity.
Be sure you understand the charges. Carefully consider whether you need the benefit. Variable Annuity Charges You will pay several charges when you invest in a variable annuity. Be sure you understand all the charges before you invest. These charges will reduce the value of your account and the return on your investment. This charge is used to pay your financial professional a commission for selling the variable annuity to you. This charge is equal to a certain percentage of your account value, typically in the range of 1.
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This charge compensates the insurance company for insurance risks it assumes under the annuity contract. Example: Your variable annuity has a mortality and expense risk charge at an annual rate of 1. 250 in mortality and expense risk charges that year. The insurer may deduct charges to cover record-keeping and other administrative expenses. Example: Your variable annuity charges administrative fees at an annual rate of 0. You will also indirectly pay the fees and expenses imposed by the mutual funds that are the underlying investment options for your variable annuity. Special features offered by some variable annuities, such as a stepped-up death benefit, a guaranteed minimum income benefit, or long-term care insurance, often carry additional fees and charges.