The 4 Major Types of Annuities You Need to Know
Understanding Annuities in 5 Minutes or Less, annuities can be a complicated animal. There are certainly circumstances where they fit a need in one’s life and so I’d like to take a few moments to educate about the 4 main types of annuities.
A fixed annuity is similar to a CD but instead of with a bank it is with an insurance company. A fixed annuity will issue a contract and pay you a pre-determined interest rate until maturity while guaranteeing your principal. Typically, the longer you are willing to lock in your dollars the higher the interest rate paid. Like any annuity the dollars will accumulate tax deferred until withdrawal and also generally have some form of annuitization option if you so desire. Since there is no FDIC insurance on these vehicles, like a CD, there are typically higher interest rates than you can receive with a bank sponsored equivalent investment.
Who are they good for?
Fixed annuities are good for the investor who don’t have much risk at all, and lacks immediate liquidity needs. They are great for the person who wants a slightly better rate than a CD. In addition, if you are in a very high tax bracket you may find some value to the tax deferral.
Single Premium Immediate Annuity (SPIA)
Next on our list is a SPIA. You are likely already more familiar with this than you think. Essentially, a SPIA is no different than a pension or Social Security. You give an insurance company a determined amount of capital and they’ll in turn give you a fixed guaranteed payment for a certain period of time or one’s lifetime. They are extremely predictable, but in return for getting the guaranteed payments you give up control of your funds.
Who are they good for?
SPIA’s are commonly used when there is a retirement income need that must be met and a lump sum to do so. You’ll also find these work well for individuals who don’t have a need to retain ownership of the funds after the term is up, thus settling for a fixed payment that doesn’t change is adequate.
Variable annuities are a diverse mix of annuities. In the basic form you invest in mutual fund like investments called sub accounts that are tied to the markets like stock or bond portfolios. The investment value will grow or shrink depending how well the investments perform. In addition, there is usually some form of death benefit (more often than not the contributions minus withdrawals).
Unlike Fixed or SPIA annuities a variable annuity has many bells and whistles that can be added on. Two of the most common features are enhanced death benefit rider, and an income rider. The enhanced death benefit rider does what it sounds, it will give you a better payout at death then just premiums contributed. The income rider, where we really see the most traction in these products, will have some income value that grows until needing to turn these funds into an income stream. They’ll last for a certain period of time for you, or you and your spouse, and be based off of the income value depending on what age you decide to start collecting. For instance, you may invest $100,000 the income value may be $200,000 and if your guaranteed withdrawal rate is 5% well then you’d receive $10,000/yr for as long as you live. What will happen is first you’ll receive your funds back and then if you exacerbate your entire investment the insurance company will keep paying you out of their pocket until you pass away. If you die with money still left in the product either your spouse will continue the income benefit, assuming you are in a spousal rider product, or your beneficiary will just inherit the remainder funds.
Who are they good for?
I find Variable annuities are good for people who want to take some risk off the table and have a portion of their retirement income needs met through a more predictable income stream. They work well if these people still want to benefit from market performance with downside protection. Additionally, they work nicely when someone wants to leave unused funds behind to their heirs, which usually comes with less guaranteed income then a SPIA where you give up full control.
The other type of person who variable annuities work for is one who has funds they don’t need to touch, but have some insurance needs but might not be insurable.
Fixed or Equity Indexed Annuity
These are by far the most confusing of the annuity family and thus tend to be misunderstood and misrepresented quite often. These types of annuities are a hybrid between fixed and variable annuities. There is generally some fixed floor on how low your returns can be and additionally a capped ceiling as well. At the end of the term you can take your funds, get a new term, or turn into income. Personally I am not the biggest proponent of these annuities, but in certain select circumstances may be appropriate compliment to an investment portfolio.
Who are they good for?
I have a hard time pin pointing the appropriate person these are good investments for. Sometimes they can offer a higher income guarantee than variable annuities while still maintaining ownership of the underlying investment. These are basically the only times I’ve found them to be appropriate in my many years in this profession.
Like any investment annuities have their places they work well and their places they are not appropriate. If investing in one make sure you grasp the nuisances and are well aligned with a financial planner whom you trust and understands your retirement needs.
NBA Player Carl Landry Demonstrates the Value of Persistence in Life and Work
Written by: Jon Sabes
When you meet Carl Landry, stand-out college basketball player and nine-year NBA player, you imagine that becoming a professional basketball star was a straight forward run for the 6-foot-nine-inch power forward.
However, when you go deeper into Carl’s background, becoming a NBA professional was less than certain and little came easily to the 33-year-old from Milwaukee:
- He was cut from his high school team as a freshman and averaged less than ten points a game when he did play as a senior.
- He started his college career not at Purdue, but a junior college where it was not clear he would play.
- When he finally got to Purdue, he tore his ACL in his knee his first year and reinjured it the next year.
- While his family held a party for him the night of the NBA draft, he slept in the Philadelphia airport after missing a flight following a workout for the 76ers.
- In the NBA playoffs, Carl had a tooth knocked out, but came back in the same game to make a game-winning blocked shot as the Rockets beat the Utah Jazz 94-92.
Landry, who I interviewed on my podcast, Innovating Life with Jon Sabes (www.jonsabes.com), is a remarkable example of the value of “persistence.” In a time where technology creates the image that anything is possible at the touch of a button, persistence is an under-appreciated trait. When I spoke with Carl, I clearly saw someone for whom success has only come through a force of will that made him a NBA player, but it also made him a better player every year he played. That’s the kind of personality that has produced greatness in business as well as sports.
Carl was, in fact, drafted that night he spent in the airport. The Seattle Supersonics chose him as the 31st overall pick and then traded him to the Houston Rockets where he rode the bench for much of the first half of the season. When All-Star teammate Yao Ming was injured, he stepped in and played a key role in the Rockets astonishing 22-game winning streak (the third longest streak in NBA history). And, that season, after sitting on the bench for 33 of the first 36 games, he was named to the All-Rookie second team.
Carl was the first in his family to go to college. “I told myself that this was my ticket out, so I did everything I possibly could to be the best person in school and also on the court,” he said.
His family life in Milwaukee showed him what he didn’t want to do. “Just being honest with you, seeing some my cousins, peers, they went to work for jobs paying six, seven dollars an hour or they didn’t go to work at all and then living off welfare. I didn’t want that.”
When he was first injured, he had to contemplate the end of a career before it even got started. “When you have an ACL tear, it’s over…no more basketball,” he told me. “I said, God, give me health again and I’ll do everything I can to leave it all out on the line and be a successful individual.”
On my podcast, Carl pointed out another interesting lesson he learned in the NBA: Not doing things just to fit in.
“Fitting in was easy,” he said. “Doing everything that everybody else does was easy. If I stood out in some type of way, I’m going to have different results. I’m going to have stand-out results.”
That’s called the “Law of Contrast” and it produces that exact effect of changing the outcomes that everyone else is experiencing. Carl is smart, he recognized that differences make a difference, and doing whatever it takes is what is required to make real, meaningful differences.
Every off-season for the last 11 years, he has run a camp for kids in Milwaukee where he tells youth his story of hard work and persistence. “I always tell the kids to apply themselves and always be persistent,” he said. “If you dream, apply yourself and be persistent. With hard work, man, the sky’s the limit.”
When Carl says the sky’s the limit he means it. He is smart to recognize that it’s important to dream big, because if we don’t – we may be selling ourselves short. “You have to dream bigger than your mind could ever imagine,” he said. “I wanted a nice house. I wanted a nice car. I said, and I got all of that. So, what do I do, do I stop now? Maybe I didn’t dream big enough.” That’s a big statement coming from a kid who grew up to be the first in his family to graduate college and go on to be not only a top NBA basketball start, but a good businessman, father and someone who gives back to the community.
I’m convinced that in whatever he takes on as a basketball player or in his post-hoops career, Carl Landry is not going to stop getting better at whatever he does, and in the process of doing so, make the world a better place.
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