Financial Services
Accumulation Annuities
These insurance products have changed dramatically over the past 10 years. Previously, many companies would not allow you to get your money until you had already made payments over many years. In addition, the early withdrawal penalties could be terribly high.
This is no longer the case. Many annuities pay a reasonable fixed return and allow full withdrawals after 2 years. In other words, you guarantee your return very much like a bank CD and at the end of the policy period you simply walk away. The most popular time frame tends to be 5-10 years with the longer terms generally having a higher interest rate.
Annuity interest can be based upon a number of options. (We won’t discuss variable annuities which are a little different than mutual funds.
You can purchase an annuity at a guaranteed interest rate for the life of the product. This is most similar to a bank CD. You decide how long you wish to invest and the company offers an interest rate. This is called a “Multi-Year Guaranteed Annuity”, or MYGA for short. For many of us who are interested in a better rate than the bank with the safety of a large insurance company behind it this is a terrific option.
The other choice in a fixed (not variable) annuity is a Fixed Index Annuity (FIA). These products may grow faster than the MYGA because a portion of your money is tied to a stock market index such as the S&P 500. Using the simplest type of FIA you deposit your money and are guaranteed never to lose. Your upside is a portion of the growth of the index. So if the market goes down you have a zero return for that year. If it goes up, you gain a portion of the gain.
Both the MYGA and FIA will shelter your money from current taxation. And as long as the money (and gain) remains in an annuity there will be no income tax.
Rates change almost weekly as one can imagine. Interest rates in general fluctuate and the lower the general interest rate, the lower you can find in a MYGA rate. But in times of uncertainty, a 2-3 year annuity might be a great choice as the interest rate is generally higher than the bank.
FIA may be a great value since when the market drops you don’t lose. Every year your “index” resets, so a down year of (for example) 20% resets your index to a much lower rate.
To use an extreme example:
Money Invested directly in the stock market . . .
Year 1 - Stock Market drops 50% so you have 50% of your money
Year 2 - Stock Market goes up 50%, you actually only have 75% of what you started with.
Do the math. Take $100 and lose $50. It goes up 50% which is $25.
FIA
Year 1 - Stock Market drops 50% you have 100% of your money.
Year 2 - Stock Market goes up 50%. You have a potential gain of 25% over 2 years.
(disclaimer - It’s unlikely you’ll find a plan that gives you all the gain, but you see my point)
For many people either a MYGA or FIA is about the best investment available.
SPLI
Annuities are great but let’s discuss a product that can increase the amount of money you leave for your family. We call this “leave behind money.” Similar to an annuity you deposit a set amount of money and the growth can either be at interest or tied to an index. Many plans will guarantee a return of your deposit regardless of surrender charges making them extremely flexible. But since this is a life insurance policy with one premium, the amount left for family will always be more than the deposit. Much more.
As an example of how this works, let’s use a 70 year old woman and call her Amy.
Amy has $50,000 in the bank that is earmarked for her 2 grandchildren to help with college. While this money is the last funds she would want to use for herself, Amy knows that in an emergency she may have no choice. So, what can Amy do?
Amy chose to move $40,000 into a SPLI policy. In her case she wanted the certainty of a fixed return although she could have used an index product for potentially more growth. The $40,000 grew to $72,000 for the grandkids as “leave behind money.” What about the remaining $10,000? Amy took the family to Disneyworld for a vacation that all would remember long after she was gone.
Remember, despite early withdrawal penalties, Amy would be guaranteed no less than her original $40,000 should she ever change her mind.
This is a fantastic product. No bank account nor annuity can do what a SPLI policy can do. If you have leave behind money, please take a look at this.