Features Annuity (American)

a variety of features , guarantees have been developed insurance companies in order make annuity products more attractive. these include death , living benefit options, credit options, account guarantees, spousal continuation benefits, reduced contingent deferred sales charges (or surrender charges), , various combinations thereof. each feature or benefit added contract typically accompanied additional expense either directly (billed client) or indirectly (inside product).

deferred annuities divided 2 different kinds:

fixed annuities offer sort of guaranteed rate of return on life of contract. in general such contracts positioned bank cds , offer rate of return competitive of cds of similar time frames. many fixed annuities, however, not have fixed rate of return on life of contract, offering instead guaranteed minimum rate , first year introductory rate. rate after first year amount may set @ insurance company s discretion subject, however, minimum amount (typically 3%). there provisions in contract allow percentage of interest and/or principal withdrawn , without penalty (usually interest earned in 12-month period or 10%), unlike cds. fixed annuities become liquid depending on surrender schedule or upon owner s death. equity index annuities categorized fixed annuities , performance typically tied stock market index (usually s&p 500 or dow jones industrial average). these products guaranteed not easy understand standard fixed annuities there caps, spreads, margins, , crediting methods can reduce returns. these products don t pay of participating market indices dividends; trade-off contract holder can never earn less 0% in negative year.
variable annuities allow money invested in insurance company separate accounts (which referred subaccounts , in case functionally similar mutual funds) in tax-deferred manner. primary use allow investor engage in tax-deferred investing retirement in amounts greater permitted individual retirement or 401(k) plans. in addition, many variable annuity contracts offer guaranteed minimum rate of return (either future withdrawal and/or in case of owner s death), if underlying separate account investments perform poorly. can attractive people uncomfortable investing in equity markets without guarantees. of course, investor pay each benefit provided variable annuity, since insurance companies must charge premium cover insurance guarantees of such benefits. variable annuities regulated both individual states (as insurance products) , securities , exchange commission (as securities under federal securities laws). sec requires of charges under variable annuities described in great detail in prospectus offered each variable annuity customer. of course, potential customers should review these charges carefully, 1 in purchasing mutual fund shares. people sell variable annuities regulated finra, rules of conduct require careful analysis of suitability of variable annuities (and other securities products) whom recommend such products. these products criticized being sold wrong persons, have done better investing in more suitable alternative, since commissions paid under product high relative other investment products.

there several types of performance guarantees, , 1 may choose them à la carte, higher risk charges guarantees riskier insurance companies. first type guaranteed minimum death benefit (gmdb), can received if owner of annuity contract, or covered annuitant, dies.

gmdbs come in various flavors, in order of increasing risk insurance company:

return of premium (a guarantee not have negative return)
roll-up of premium @ particular rate (a guarantee achieve minimum rate of return, greater 0)
maximum anniversary value (looks @ account value on anniversaries, , guarantees @ least as highest values upon death)
greater of maximum anniversary value or particular roll-up

insurance companies provide greater insurance coverage on guaranteed living benefits, tend elective. unlike death benefits, contractholder cannot time, living benefits pose significant risk insurance companies contractholders exercise these benefits when worth most. annuities guaranteed living benefits (glbs) tend have high fees commensurate additional risks underwritten issuing insurer.

some glb examples, in no particular order:

guaranteed minimum income benefit (gmib, guarantee 1 minimum income stream upon annuitization @ particular point in future)
guaranteed minimum accumulation lbenefit (gmab, guarantee account value @ amount @ point in future)
guaranteed minimum withdrawal benefit (gmwb, guarantee similar income benefit, 1 doesn t require annuitizing)
guaranteed-for-life income benefit (a guarantee similar withdrawal benefit, withdrawals begin , continue until cash value becomes zero, withdrawals stop when cash value 0 , annuitization occurs on guaranteed benefit amount payment amount not determined until annuitization date.)

recently, insurance companies developed asset-transfer programs operate @ contract level or fund level. in former, percentage of client s account value transferred designated low-risk fund when contract has poor investment performance. on fund level, investment options have target volatility built within fund (usually 10%) , re-balance maintain target. in both cases, stated buffer poor investment performance until markets perform better (where transition normal allocations catch upswing). however, there criticisms of these programs including, not limited to, mandating these programs on clients, restricting flexibility of investing, , not catching upswing of markets fast enough due underlying design of such programs.

be careful in regard using glb riders in non-qualified contracts of products in annuity marketplace today create 100% taxable income benefit whereas income generated immediate annuity in non-qualified contract partially return of principal , therefore non-taxable.