Deferred Annuity Contracts vs. Stock Investment

An overwhelming majority of Americans that participated in a June 2002 Gallup poll said investment in the Stock Market is not as likely dur to recent changes in the market. Up from the 40 percent of Americans who shared that view in March 2001.

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Given the current climate, what would you do with $100,000 today? If you are like the majority in the survey, you may be rethinking how much risk you are willing to assume. One way to shift more risk away from your assets yet still earn a guaranteed return is with a fixed annuity. Rumors of the fixed annuity’s death were greatly exaggerated in the late 1990s when investors were growing accustomed to double-digit returns. Given the investor outlook revealed in the Gallup survey, it’s no surprise that fixed annuity sales hit a record $22.1 billion during the first quarter of 2002.

Security Provided by a Deferred Annuity

A fixed annuity offers a guaranteed rate of return for a specific period, no matter what happens to the economy or the financial markets. Your contributions are invested during the accumulation phase, and any earnings accumulate tax deferred and are taxed as ordinary income when you begin making withdrawals.

Flexibility of Deferred Annuities

The return is just about the only part of a fixed annuity that is truly fixed. Methods to put money in and take it out are tremendously flexible. During the accumulation phase, you can contribute a lump sum or set up a system of payments. Fixed annuities are not subject to federal contribution limits, unlike several other tax-deferred investments.

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When you reach age 59½, you can elect to receive an income for life, for your life plus the life of a beneficiary, or for a specific period. You are also free to take a lump-sum distribution or leave the money invested and make withdrawals as needed. Some individuals erroneously perceive annuities as a vehicle for less-sophisticated investors who lack the savvy for riskier investments. A tax-deferred investment with a guaranteed return can play a strategic role in almost any portfolio.

Plan your annuity purchase with the knowledge that guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company. Although it is possible to have guaranteed income for life with a fixed annuity, there is no guarantee that this income will keep up with inflation. Annuity withdrawals are taxed as ordinary income and may be subject to surrender charges plus a 10 percent federal income tax penalty if made prior to age 59½. Surrender charges may also apply during the policy’s early years.

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