Understanding Annuities

An annuity is a product offered by an insurance company designed to accept and potentially grow funds provided by an investor. These funds can come in the form of a lump sum or periodic payments. At a later time – usually at retirement – the investor takes payouts of the accumulated funds in the form of installments or a lump sum payment.

The Plan does not offer annuity products as an investment or distribution option. This article is designed to provide you with information about annuity products that you may want to discuss with your financial advisor.

Types of annuities

There are two types of annuities, fixed and variable.

• Fixed annuities have a fixed rate of return that is revised periodically.
• Variable annuities offer multiple investment options, such as stock funds, bond funds and cash-equivalent funds. The rate of return depends on the performance of the various investments. Money invested in a variable annuity is typically subject to fees that are not applicable to fixed annuities.

The advantages of annuities

Investing in annuities can offer you a number of advantages, including:

• Deferred taxes – Potential earnings are not taxed until they are withdrawn, typically in retirement
• Death benefit – A minimum death benefit is usually paid to a named beneficiary regardless of the investment performance
• Income for life – Depending on the account balance and the investor’s expected life expectancy, the choice to receive a monthly income payment for life is available

The disadvantages of annuities

One of the disadvantages of annuities is additional fees. Annuitants may face additional administrative fees, along with additional surrender charges and tax penalties if the money is accessed prior to age 59½. See Annuity charges below for more information.

Annuity charges

The following charges are associated with annuities:

• Administrative fees – Most variable annuities charge a general fee to offset standard administrative expenses. These fees are often waived once a predefined minimum account balance is met.
• Management fees – Investment options available in variable annuity contracts have underlying fees, similar to mutual funds, to pay for the investment management of the assets.
• Mortality and expense (M&E) risk charge – Most variable annuities charge this fee to offset costs the insurance company incurs to guarantee a minimum death benefit and other insured features.
• Contingent deferred sales charges (CDSC) – This charge is considered “contingent” because it is only applied if money is withdrawn from the annuity early in the contract. This charge covers the insurance company’s costs for paying agents' commissions, and also allows 100 percent of the investor’s money to be initially invested. Typically, the longer the investor’s money remains invested, the lower the charge will be. After the money has been invested for a period of time defined by the contract, the CDSC is waived.