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What is a tax-deferred annuity?
It is a tax-advantaged product issued by an insurance company where long term financial needs can be solved better than with most other financial alternatives.
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What is the major advantage of annuities?
Interest (earnings) accumulates income tax deferred until dollars are withdrawn. This helps clients build substantial funds for their retirement and can give them an income they cannot outlive.
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Is an annuity safe?
Yes. Insurance companies are the only financial institutions that may underwrite and issue annuity contracts. Fixed Annuity values are backed by the general assets of the insurance company. The Department of Insurance in each state must issue licenses to the insurance company and their agents who solicit business in that state.
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Who wants to own an annuity?
People who want a safe way to reduce taxes; people who want to decide when to pay taxes.
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Who is the average annuity purchaser?
The average age is 73 with an average premium of $84,000 at GILICO. Generally, the buyers are not currently spending the interest they earn on their taxable alternatives.
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What kind of dollars are going into annuities?
Maturing CDs, checking and savings accounts, money market funds, mutual fund accounts, stocks and bond funds, IRA rollovers, Treasury bonds and bills.
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Is the annuity for everyone?
No. Dollars earmarked for short-term needs should not go into the annuity. In addition, at least 6 months of income should be saved for emergencies outside of the annuity. Also, those who need current income should consider an immediate annuity, not a deferred annuity. On the other hand, those looking for one of the safest ways to accumulate dollars on a tax-advantaged basis will find the deferred annuity extremely beneficial.
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Since a withdrawal of principal is tax-free and IRS penalty free, can principal be withdrawn first and then interest?
No, the IRS requires that interest earnings are withdrawn first. Naturally, any portion of a withdrawal exceeding interest earned would be a tax-free return on principal.
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What if the annuity is paying an interest rate less than other financial alternatives?
You should first compare the value of the no-market-risk feature of the annuity to other alternatives you are considering. You then must remember that the interest on many alternatives is currently taxable every year. Also, Section 1035 of the Internal Revenue Code allows annuity owners to move their dollars from one annuity to another annuity income tax-free.
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How is the interest rate declared after the initial guarantee period?
Current market conditions and the insurance company’s investment portfolio will dictate renewal rates. GILICO uses the Portfolio Rate method to determine rates after the initial guarantee period. This means that renewal credited rates may float up or down, depending on overall portfolio investment yield.
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Why do you guarantee rates on some policies and do not guarantee rates on others?
Generally, the longer the surrender charge, the higher the interest rate, and guaranteed rates are generally lower than non-guaranteed rates. GILICO is pleased to offer a wide variety of annuity products to meet many policyholder needs. Surrender charges vary from 4 to 12 years. Agents work with clients to determine the needs and financial situation of the prospective policyholder. The agent helps the policyholder to determine which product(s) best fit their individual, specific needs. Some products have shorter time horizons (surrender charges) than others. Some have higher rates and first year bonuses. Some have guarantees. We have developed consumer-oriented products with several options. A prospective buyer should discuss product options with his or her agent.
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How will clients know their annuity balance?
GILICO provides a statement of annuity value on each policy anniversary or whenever requested by the policyowner.
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Will the annuity be tied up in probate proceedings?
No. If you list a named beneficiary, other than your estate, annuity dollars will avoid the delay, expense and frustrations of probate.
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Will the beneficiary be taxed on the interest that has accumulated inside the annuity?
Yes, beneficiaries will be taxed on the tax-deferred interest when they receive those dollars. However, if a beneficiary is the spouse of the owner and the owner dies, he/she may elect to continue the annuity and postpone taxes. Once again, the client decides when to pay income taxes. If the beneficiary is not the spouse and the owner dies, then dollars must be totally withdrawn within five years or they may be received over the beneficiary’s life expectancy. However, this latter option must be elected during the first 12 months following the owner’s death.
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Is the annuity identical to an IRA?
No. Although the annuity is often used as a funding vehicle for an IRA, many sales are for non-qualified annuities with premiums from after-tax dollars. Therefore, dollars deposited into a non-qualified annuity are not deductible. However, there is no government-imposed ceiling on how much premium can go into an annuity, and distributions do not have to begin at age 70. Some people have said that an annuity picks up where the IRA leaves off.