Insurance Continuing Education - Long-Term Financial Strateg

As a general rule, annuities should be considered part of a long-term investment strategy rather than as a short-term liquid savings account. One of the primary benefits of annuities- the tax-deferral on interest - applies only as long as the funds deposited in the annuity are not withdrawn. When the tax consequences are discussed later in this text, it becomes apparent that the Internal Revenue Service tax penalties can be quite severe. In addition, the insurance company imposes its own penalties in the form of surrender charges or interest rate adjustments when annuity funds are withdrawn under certain circumstances.
The exception to the long-term investment strategy is the use of a single premium immediate annuity, as discussed in a previous section, to begin providing income payments as soon as possible. In this case, of course, the purpose is to pay an immediate stream of income, not to build up funds for the future.
For the most part, however, annuities are purchased with flexible premiums in order to defer the income return until some future date and to reap the tax benefits in the meantime. Annuitants who adhere to the long-term strategy are thus "rewarded" and annuitants that do not are penalized. At the same time, the flexibility and withdrawal privileges of newer annuities are more sensitive to changing financial circumstances, so that annuity owners who encounter large, unexpected immediate financial needs are able to access their annuity funds to some extent.
Variable Annuities and Equity Index Annuities, especially, are best perceived as long-term investments. Like the stock market, the securities that underlie a Variable Annuity have in the past, generally performed well over the long term in spite of some significant downturns from time to time.
Historically, a mix of securities, such as those that are investments for Variable Annuities and mutual funds has been profitable over an extended period of time. The key to using annuities successfully and for the purpose to which they are designed, is avoiding the temptation to withdraw from the investment during temporary downturns in the market.
Annuities may be written as either qualified or nonqualified contracts. "Qualified" means the annuity is established and maintained according to Internal Revenue Service rules that permit a tax deduction for the premiums paid. This means no current income tax is required on the portion of income used to pay premiums for a qualified annuity. Nonqualified annuity premiums, on the other hand, are paid for with after-tax dollars, which means contributions is not tax deductible.
In the survey of the 21 EIAs discussed above, the Minimum/maximum age varied with some companies as to whether the plan was qualified or non-qualified and in some cases, the minimum and maximum premium. The maximum premium in those policies are usually equal to the maximum allowable contribution to an IRA.
The only qualified annuities available for most individuals are those used to fund Individual Retirement Accounts (IRAs). For corporations and other business entities, group annuities designed to fund employee or other group retirement plans may also be qualified. In both individual and group situations, the annuities must be designed for and operate under stringent IRS qualification guidelines.
While most insurance companies offer both qualified and nonqualified annuities, some do not. Of the various types of annuities offered by a single insurer, some types may be written only as qualified plans while others may be written only as nonqualified annuities. Some may restrict their qualified annuity offerings to certain uses, such as for IRAs or for 403(b) organizations, discussed later.