ANNUITY COMPANY IN GRAND RAPIDS, MICHIGAN
Best Annuity Company
In a recent study conducted by the National Institute on Retirement Security, 78 percent said disappearance of pensions has made it harder to achieve the American dream. If having a fixed income for the rest of your life seems appealing, you may want to speak with us about annuities. Adding an annuity to your financial portfolio will increase the opportunity to ensure a portion of your post-retirement income is guaranteed. We encourage you to schedule an appointment to sit down with a qualified and certified member of our team to discuss all options.
Best Annuity Companies
What are Annuities? Are they good or bad? Are they all the same? Why do people purchase annuities? How to find a good annuity provider? Which are the best annuity companies? How do you find the best annuity companies in Grand Rapids, MI?
What’s an annuity?
Annuities have been around for more than 2,000 years. They were first given to loyal Roman Soldiers after their period of service ended to provide an ongoing income for the rest of their lives. Annuities were popular in England more than 300 years ago and were used to reward loyal household servants who could no longer perform their duties. President Abraham Lincoln supported the idea of creating annuities that would benefit disabled civil war soldiers. Many famous people have used annuities, including the baseball legend Babe Ruth who invested almost all of his funds in annuities and is quoted: “I may take risks in life, but I would never risk my money, I use annuities, and I have never had to worry about my money.”Today, fewer than 15% of private companies offer traditional pension funds. As traditional pensions and other defined benefits plans continue to become increasingly scarce, annuities are a way to transfer a bit of the risk associated with retirement to an annuity provider. Annuities can help fill that gap of “all at risk” associated with having 100% of retiree savings in “Wall Street” based investments. Many retirement plan consultants suggest using annuities and an integral part of a retirement plan. Change “Almost all” to “Many” as “Almost all” is a false and misleading statement
Individuals who purchase annuities are typically looking for guarantees and/or favorable income tax benefits. They tend to be older, more conservative investors who are looking to protect what they’ve accumulated. They typically are seeking either income options or additional growth on their capital, without current taxation as interest accumulates tax-deferred until withdrawn.”
Investing in annuities with the best annuity companies can be a smart move if you’re interested in safety and a reasonable growth rate of 3-7%. They are suitable for individuals who are 40-85 who are risk-adverse but want a tax-deferred investment that will out-perform the paltry interest rates offered by banks.
What Are The Three Major Types Of Annuities? How Do They Work?
Fixed Annuities
appeal to the traditional ‘Bank CD” (Certificate of Deposit) buyers, as they offer a guarantee of premium and a guaranteed interest rate. Unlike Bank C.D.s which are taxable annually, most annuities are “tax-deferred,” where the money is not taxable until it’s withdrawn. In this way, individuals can control when they pay taxes on the growth of their funds or choose to pass the gain to their heirs, where the gain can be spread over several tax years. “Declared Rate” fixed annuities feature a rate guaranteed for a stated number of years, which are often 2-10 times higher than currently available with Bank C.D.s. Example: With the best annuity companies, a five-year declared rate annuity at 3.25% (tax-deferred) vs. a 5-year Bank CD rate of 1.3% (taxable). Plus, with the annuity, at the end of the term, the buyer has several options. They may withdraw the funds without penalty or avoid current taxation on the gain or exchange it for another annuity with a higher rate with a different annuity provider through an IRC Section 1035 tax-free exchange.
Most fixed annuities offer by annuity companies do not have any fees, commissions, or sales charges deducted from the premium deposit.
Fixed Indexed Annuities (FIAs)
offer the same guarantee of premium and guarantee minimum interest rate as traditional fixed annuities with greater upside growth potential. Today, most declared rate annuities offer interest rates that range from 2.5%-3.5%, whereas a Fixed Index Annuity may offer up to twice the rate of return.
Fixed indexed annuities have been available since 1995. Fixed Indexed annuities allow individuals to earn attractive returns when times are good, without experiencing losses when times are bad. Most have been linked to the S&P 500 index (the 500 leading companies in the United States determined by Standard and Poor’s), although today, many other indices are common. Many of these annuities have a history of years with double-digit returns, without risk of loss due to market downturns. The “annual reset” or ratchet-like approach is common, where the accumulated value goes up during market advances, but previous gains are retained or “locked-in” when the market falls.
While the fixed indexed annuity is LINKED to the Underlying Index (as that is how the interest rate is determined), the funds are NOT directly invested in the index. The majority of the premium is invested in the general account of the annuity provider and held in investment-grade bonds. This is how the annuity provider can guarantee that the accumulated value of the account does not decrease during periods of market losses. The remaining premium (over acquisition expenses) is used to purchase options on the index. This allows the company to credit interest based on the movement of the index. The annuity providers make a spread on the funds they hold, and annuity companies typically make money on the accounts regardless of the movement of the index.
One of the drawbacks of the fixed indexed annuity (as with a Variable Annuity) is that the future returns are unknown when the annuity is purchased (unlike the fixed “declare-rate” annuity). Secondly, the buyer is giving up some potential upside return that they would have had in “at-risk investments” in exchange for the safety of premium and guarantees that the annuity offers. While many FIAs can achieve attractive rates of return (occasionally, as high as 15-20%), they don’t compare to the explosive returns available from hot tech stocks during a manic run. The other disadvantage is that the buyer gives up a degree of liquidity. Most have a set term: 5,7, 10 years, or longer. During this term, Surrender Charges (penalties) may be imposed if more than 10% annually is taken as a free withdrawal. If larger withdrawals are made during the surrender charge period for reasons other than Required Minimum Distributions (RMDs), confinement to a hospital or nursing home, terminal illness, or death, the issuing company typically will impose surrender charges which typically decline annually over the term of the annuity. For this reason, retaining liquid assets is vital for emergency fund purposes and, otherwise, diversify a retirement portfolio so that funds are accessible when needed without penalties.
Many index annuities have caps that limit the amount of increase. The caps are affected by prevailing interest rates.
When interest rates were high, the best annuity companies were able to offer higher caps and participation rates, such as receiving 85% of the increase of the S&P 500 up to a cap of 14%. Today’s lower rates leave less money available for the options which are purchased to offer the upside potential. With interest rates near zero, individuals may now receive only 60% of the increase with a cap of 8%. This is still an attractive rate of return when compared to a Bank C.D. paying less than 1%. Today, there are many other indices available with annuity providers, including proprietary indices. These indices have been developed by well-known companies such as J.P. Morgan, Bloomberg, Blackrock, Merrill Lynch, as well as many others and often feature “uncapped indices” which may offer the potential for double-digit returns.
Fixed Indexed annuities may work well for individuals who are looking for a replacement for the allocation normally positioned in a bond portfolio. This concept has been studied and promoted by Dr. Roger Ibbotson, Professor in the Practice Emeritus of Finance at Yale School of Management. Profession Ibbotson has written that Index annuities are a useful alternative to the traditional bond component of a retirement portfolio, which can produce superior returns with less risk. For years the 60/40 split (60% stocks/40% bonds) was considered a basis for retirement portfolio equities and bonds. However, with stocks in a bubble and bonds yielding near-zero, they face an inherently huge interest rate risk when we re-enter a rising interest rate environment. Many financial planners are concerned that it is a recipe for disaster.
Example: As of October 26, 2020, our 30-year Treasury Bond yielded 1.59%. On $100,000, we would receive only $1,590 per year in interest. This is sobering, especially when you acknowledge that in 2019, the inflation rate was 1.81%. (Source: Statista). Not only do bonds provide paltry interest rates, but given today’s historically low rates, they subject capital to greater risk, should the interest rates ever rise in the future. Interest rate risk is expected for all bonds; when interest rates rise, prices of fixed-rate bonds fall. The longer maturity of a bond is, the more magnified the potential drop in market value will be. If interest rates rose to 8% in the above example, our $100,000 30-year treasury bond would sell for only $27,318! Dr. Ibbotson argues that such potential losses in bonds make investments in Indexed annuities relatively a more desirable alternative which have no corresponding losses when interest rates rise while producing 300-400% more yield.
As bond investors chase yield (especially in non-investment grade/junk bonds), this drives down the yield, expanding the bond bubble, which once again makes annuities with the best annuity companies more attractive.
Fixed Indexed Annuities are not subject to loss of principal during market fluctuations. Most FIAs do not have any fees, commissions, or sales charges deducted from the premium deposit by the annuity provider. FIAs typically don’t have the fees associated with Variable Annuities such as Mortality and Expense charges or the sub-account expense ratios associated with the Variable Annuities. However, they also typically do not offer as much upside available as a Variable Annuity.
Variable Annuities may offer the greatest upside potential when compared to the fixed and Fixed Indexed Annuities. Variable annuities are Securities. As securities, buyers are directly participating in the securities markets with the benefit of tax-deferred accumulation. Because they are directly participating in the market, they are exposed to both market volatility and potential investment losses. Most variable annuities have “sub-accounts,” which are in many ways similar to mutual funds and can be allocated according to the investment needs of the buyer. Some of the best annuity companies offer as many as 140 sub-accounts. These offer a wide range of goal-specific managed by known household names such as Vanguard, Fidelity Investments, Blackrock, T. Rowe Price, American Funds, etc. Many variable annuities feature guaranteed income options or living benefit riders, which offer guaranteed lifetime income even in the event of substantial market losses. The disadvantage of a Variable Annuity is that, unlike the fixed and fixed indexed annuity, the buyer can lose principal/premium during market losses, where their accumulated value drops during market sell-offs.
Pros and Cons of annuities
Most annuities are “tax-deferred” – not “tax free”. The exception is the Roth IRA/Annuity, which grows income tax-free and can be withdrawn and spend income tax-free. The gain on all other annuities is taxed as “ordinary income” in the tax year the funds are withdrawn. This is true whether the annuity is set up as an IRA/Annuity which uses qualified funds (pre-tax funds) or with an after-tax premium which is known as a “Non-qualified” annuity. Either way, when you take the money out of the annuity, the gain becomes taxable income to the recipient. An adage worth remembering: “With annuities, someone, someday will pay the tax on the gain.” Either the person who purchased the annuity or their beneficiary.
Annuities should be considered long-term investments. While some have terms as short as 3 or 5 years, many have terms of 7-10-year or longer. Annuity providers design annuities to remain on their books for a period of years and build in disincentives for early termination. These include surrender charges, market value adjustments, and recapture of bonuses offered at purchase for surrender before the end of the term. Most annuities waive these potential charges in the event of death, disability, or terminal illness and allow a 10% free annual withdrawal without penalty or loss of interest.
Risk tolerance and Risk/Reward considerations are key factors when considering an annuity. Most people have an unlimited tolerance for gains but not for investment losses. Variable Annuities offer the greatest accumulation potential, but unlike the Fixed and Fixed Indexed Annuities where the costs of the product are built into the rates, Variable Annuities are sometimes criticized for their fee structure. Variable Annuities have a stated mortality and expense charges, and the sub-accounts fees must also be considered. Variable Annuities also have deferred contingent sales (surrender charges) for early termination before the end of the term.
The financial ratings of the annuity provider are very important, as guarantees are only as good as the guarantor. While most states offer a safety net of a Life and Annuity Guarantee Association (which does not offer protection from market losses), buyers should look carefully at the issuer’s financial strength to determine if they amount to the best annuity companies. Compare the ratings of the Major Rating firms such as A.M. Best, Moody’s, Standard and Poor’s, and Duff and Phelps rating companies. We can help you discover the best annuity companies in Grand Rapids, MI.
