Questions – Deferred Index Annuities

Questions - Deferred Index Annuities
by Steve Goodman

CPA, MBA – President & Chief Executive Officer

Contact Steve today for more info.

Q: For how long are surrender charges assessed and what are the surrender charges each year?

A: Annuities have different surrender charges and surrender charge periods. Make sure you understand this and compare surrender charges and surrender charge periods between different annuities.

Q: Is there an amount that can be taken out of an annuity each year without a surrender charge? If so, what is this amount and does it carry over to the next year?

A: Most annuities allow you to withdraw 10% each year without any surrender charges or market value adjustments.

Q: Why are insurance carrier ratings from S&P, Moody’s, Duff & Phelps and Weiss important?

A: It’s critical that you work with a high-quality insurance company. An annuity is a long-term liability on the part of the insurer so you want to be sure the company will be around for the long haul. Therefore, make sure you compare the ratings of various companies to determine their quality.

Q: Does it matter if an insurance agent is a captive agent of a particular insurance company?

A: If an agent is a captive agent of a particular insurance company — like New York Life, Mass Mutual, Guardian, Penn Mutual or Northwestern Mutual, for example — he or she is likely to focus on selling that company’s annuities. Many insurers prohibit their captive agents from selling deferred fixed annuities. Instead, you should make sure you get quotes from different companies. Request a comparison of five of the top-rated insurance companies from your agent.

Q: How should I compare insurance companies?

A: Request a comparison of the top five rated companies and make sure that all of the questions noted here have been sufficiently answered.

Q: Should I ask about reduced commission products?

A: Yes, ask the insurance company if there are there any reduced commission products available.

Q: What are the income and estate tax consequences if I die and own an annuity?

A: You should consult with a tax advisor about questions related to the tax treatment of annuities. If you die prior to annuitization, the annuity becomes part of your estate and the value above the initial investment will be taxable at ordinary income rates.

Q: What are the different stock index options available?

A: Deferred index annuities are a very complex product, so be sure you understand which stock index options are available before you purchase. The most common option is the S&P 500, without the dividend component. Check with the issuing company for available index alternatives.

Q: Does the index return include dividends paid?

A: Dividends are normally not included in the return of the index.

Q: What are cap rates?

A: Cap rates determine how much of the index’s appreciation is credited to your account. You need to determine the minimum cap rate — which protects against down markets —the current cap rate and the most recent five-year history of cap rates.

Q: What is the participation rate? What is the current participation rate? What is the past 5 years history of participation rates?

A: A participation rate refers to the percentage of the cap rate appreciation that is credited to your account. For example, if the index goes up 7% without dividends, the cap rate is 6% and the participation rate is 50%, you would be credited with 3% (6% x 50%). You need to determine the guaranteed participation rate, the current participation rate and the most recent five-year history of participation rates.


CPA, MBA – President & Chief Executive Officer

About Steve Goodman

For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.

He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.

Email Steve today for the business succession planning you deserve.

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