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EnCompass®
The AAA Companion |
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November | December 2004
Volume 78 Issue 6
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Insurance & Financial Services
Annuities: Tried-and-True
Survey finds many of us know little about this valuable retirement tool
Even though sales of individual annuities doubled from 1996 to 2002, many of us do not really understand what these products are and how they can assist in retirement planning. In fact, a recent survey by the Insurance Information Institute found that 40% of women and 31% of men could not identify what annuities are.
Annuities have been around for a long time. Their longevity is a testament to their value. So what is it about annuities that make them such a widespread staple in financial and retirement planning? In an age with a seemingly unlimited variety of financial vehicles, what is the appeal in a simple, conservative product like an annuity?
Let's start with the basics. What is an annuity? An annuity is no more than a contractual arrangement between an individual (the annuity owner) and an insurance company to provide an income stream to someone (the annuitant). Sometimes the income stream starts right away (Immediate Annuity). Sometimes the income stream starts at sometime in the future (Deferred Annuity). An individual gives a sum of money to an insurance company and, in return, the insurance company will send regular checks for as long as the contract stipulates.
The annuitant has a tremendous amount of flexibility in structuring the income stream. Payout options range anywhere from an income the annuitant receives for life (Life Option) to an income for a specified period of time (Period Certain Option) to a specified amount of income (Payment Certain Option). The income stream can be set up to be paid to two annuitants for as long as either of them are alive (Joint and Survivor Option). The income amount varies from option to option. The amount is dependent on a variety of factors such as the age and sex of the annuitant, duration of the payments, and the amount of the initial premium.
Annuities are flexible enough to structure a payout that will accomplish almost any income objective.
There are several reasons why including annuities in financial or retirement planning should be considered:
- Income you cannot outlive — Life expectancy has increased steadily over the past several decades. One of the major concerns of today's retirees is outliving their assets. Annuities can provide an income that, by contract, will continue as long as the annuitant lives.
- Guaranteed return on principle, guaranteed return of principle-As the potential return on an investment increases, so does the risk that some or all of that invested principle might be lost. An annuity pays a competitive current rate of interest but will not pay less than the guaranteed minimum interest rate. And what money comes out of the annuity will never be less than the money that went into the annuity.
- Proceeds at death pass outside of the probate process-At the death of the annuitant, the proceeds from an annuity pass directly to a named beneficiary as provided for in the annuity contract. Annuities are estate assets, but the proceeds at death are not tied up for months while the estate is settled.
- Tax-deferred interest — Interest earned on a Deferred Annuity is not income taxable until taken out of the annuity. Deferral of interest can increase your net return on any type of interest-bearing financial vehicle.
These are some of the reasons why annuities remain a very popular financial vehicle. That's probably why they've been around for as long as they have. While they might not have the
sizzle of some of the investments touted by stock
brokers and fund managers, they do have consistency that never goes out of style. The solid, tried-and-true performers are the ones
that last.
Insurance & Financial Services
AAA Colorado has an independent insurance agency that offers products from several highly rated national insurers, including Safeco, Travelers, Progressive, Hartford, Allied, AAA Life, John Hancock and others. Additionally, now available is the exclusive "AAA Insurance" —a brand of insurance available exclusively from AAA Colorado. Coverage available through AAA Colorado includes auto, home, life, umbrella, and long-term care. Special member pricing available with certain carriers.
For information about insurance products, call AAA Colorado toll-free at 866-399-9836, or click on "Insurance" at www.aaa.com.
AAA Colorado also offers various financial services that include the "AAA Visa" card, certificates of deposit (CDs) and money market deposits.
For information about AAA deposit products, call 800-526-7120. For information about the "AAA Visa" card, call 303-753-8800, click on "Financial" at www.aaa.com or obtain an application at any AAA Colorado office.
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