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ANNUITIES FOR THE LONG-TERM

Table Of Contents


ANNUITIES – HISTORIC BACKGROUND

Annuities were first developed in Ancient Rome, as a means of both providing income for citizens and raising money for the Emperor. In the Middle Ages, annuities were used by governments to raise funds. In exchange for a one-time payment, a citizen could be guaranteed income for life. The government got the capital necessary to raise armies and conquer new lands, the plunder from which would provide the promised income.

Through the centuries, almost every financial system in the world has had some form of Annuity. Though the structure of Annuities has varied, the need Annuities address has remained constant: steady, guaranteed income from savings and tax deferred growth. Approximately $250 billion in Annuities are sold every year, according to the trade association LIMRA.


ANNUITIES TODAY
In the modern world, Annuities have evolved into a simple but useful financial product. Technically, an Annuity is a contract between a consumer and an insurance company. The Contract Owner buys the Annuity, which will provide a combination of deferred savings and/or future payments at regular intervals.

Annuities are designed to help people save and manage their retirement funds. They enjoy certain tax advantages. (Please seek the advice of a qualified professional if you have questions about buying or liquidating an annuity.) Tax Deferral works to the advantage of the Contract Owner because returns are not taxed until withdrawn from the contract. Annuities also enjoy the advantage of triple compounding. Interest is earned on deposits. Interest is earned on interest.  Additionally, interest is earned on money that would have gone to pay taxes, if that money had been placed in a product that is currently taxable. 

Annuities have two phases: the Accumulation Phase and the Payout Phase.

The Accumulation Phase is the period during which the payor is making cash contributions to an annuity and its interest grows on a tax deferred basis. This is the period when Tax Deferral is most valuable; growing more powerful as time passes and compounding becomes a powerful ally.

The Payout Phase is the period during which money is regularly dispersed from the Annuity, usually in the form of monthly, quarterly, semi-annual, or annual payments.

HOW ANNUITIES WORK
Money that is paid into a Fixed Annuity is invested by the insurance company, usually in corporate and government bonds, and other fixed income investments. The income from those investments is used to pay interest on the annuities, expenses of the insurance company, etc.

Insurance companies are regulated by the states in which they operate. They are subject to periodic audits and are required to make certain financial information public that makes it possible for consumers to objectively analyze the insurance company's financial condition. Insurance companies are also subject to regular evaluations by independent rating agencies, including A.M. Best Company. Those rating agencies closely monitor many things, including the investment portfolios of the companies, to ensure assets are adequate to cover future obligations. The rating reflects the agency's assessment of the company's ability to meet those obligations. It is important, when considering the security of any insurance company, that you consider not just the company's rating, but also the description of that rating as it is defined by the rating agency.

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TYPES OF ANNUITIES
There are both Fixed and Variable Annuities available in the marketplace. With Fixed Annuities, the investment risk is borne by the insurance company as the return is guaranteed by the company. In Variable Annuities, the investment risk is borne by the Annuity Owner as the return is not fixed, nor guaranteed by the company.  While possible growth may, in some circumstances, be greater than in a Fixed Annuity, there is also a risk of loss of Principal.

Standard Life Insurance Company of Indiana offers only Fixed Annuities.

Within the Fixed Annuity category, there are several types of annuities, each of which has different crediting and payment structures. To read about the different types of Fixed Annuities, click here.


ANNUITIES FOR THE LONG-TERM

Standard Life of Indiana does not give financial advice. But for the sake of illustration, we're going to discuss some generalities of retirement savings and where annuities may fit.

Many financial planners use Annuities to help their clients grow and preserve their estates, smooth the sometimes bumpy process of intergenerational wealth transfer (since Annuities are not subject to probate) and to help retirees reduce the amount of their income that is subject to tax.

Most people have at least three different categories of assets: Cash, short-term savings and long-term savings. During different stages of life, financial advisors advise their clients to have different proportions of their savings in each of these categories. No matter what those proportions are, Annuities should generally be thought of as long-term commitments.

There are many reasons why Annuities are most appropriate as long-term savings, but two are most important.

First, money removed from Annuities prior to the end of the Contract Period is often subject to a Surrender Charge. The Surrender Charge can be quite substantial. Second, Tax Deferral is most powerful over long periods of time. For example, $5,000 left untouched and untaxed at 5% interest for 30 years increases to more than 400% of its original value. Ten years later, after 40 years, it's more than 700% of its original value, as it collects interest on money that would otherwise have been paid in taxes.

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For these reasons, strong consideration should be given toward Annuities for anyone serious about long term savings solutions. Standard Life of Indiana offers a portfolio of long term savings products, which can be tailored to your specific needs. If your agent is not appointed with us, please ask your agent to contact us and we will connect your agent with an independent marketing organization in your general area.

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