WHAT IS AN ANNUITY?

An annuity is a contract (policy) between you as the policy holder and an insurance company. Depending on what kind of an annuity you have purchased, the insurance company will provide you with certain contractual guarantees. The minimum investment in an annuity is usually around $5000.

DIFFERENT KINDS OF ANNUITIES

There are basically five kinds of annuities: a single premium deferred annuity, an immediate annuity, a variable annuity, an index annuity, and a tax-sheltered annuity.

THE 5 KINDS OF ANNUITIES

1)A SINGLE PREMIUM DEFERRED ANNUITY (SPDA)-The SPDA,or Fixed Annuity got its name because people deposit a single premium, or lump sum, in the policy, and deferred because the taxes are postponed until money is withdrawn. An SPDA is a contract between you and an insurance company that guarantees you a specific interest rate for a specific period of time. The length of time the interest rate is guaranteed for can vary from one to seven years.

The SPDA or fixed annuity closely resembles a certificate of deposit at a bank. In both cases, you get a guaranteed interest rate for a period of time.Of course, a certificate of deposit is guaranteed by FDIC, and an annuity is backed by the financial strength of the insurance company. You will incur a surrender charge if you take more than 10% of your money out within the penalty period, and in a CD you'll be faced with a six-month interest penalty if you withdraw money before the time period is up. The difference, however, is that with a certificate of deposit, you will be paying taxes each year on the interest you have earned,where an annuity grows tax deferred.

2)SINGLE PREMIUM IMMEDIATE ANNUITY (SPIA)-An immediate annuity is a contract with an insurance company that guarantees you an immediate fixed income for the rest of your life, and, in some cases, continuing for a certain period even after your death.

I am not real fond of this type of annuity because I see very little benefit to the investor. If the investor has a SPDA or fixed annuity and needs income, the can simply opt to take their 10% free withdrawl each year, or annuitize the contact over a period of time. Depositing a lump sum in this type of annuity simply for income is not a wise choice.

3)VARIABLE ANNUITY -A variable annuity is also a contract with an insurance company for a specific period of time, but when you deposit money into a variable annuity, the money can be used to purchase mutual funds,or simply put in a money market or fixed account within the insurance contract.

A variable annuity can have many funds for you to choose from, and some allow you to even purchase bonds. One of the main attractions of a variable annuity is they can be used as retirement plan substitutes. Your contributions to an annuity are usually with after tax dollars, but you will enjoy the benefits of growing your money tax deferred. In taxable accounts, you probably have had large gains in mutual funds that you wanted to sell, but haven't done so, because you'd have to pay so much in taxes. A variable annuity can solve this problem.

4)INDEX ANNUITY- An index annuity is a contract with an insurance company for a specific period of time. The surrender period on an index annuity is usually about 7 to 10 years. The index annuity tracks an index such as the Standard and Poor's 500 index, and your return on your money will usually be a percentage of what that particular index did for your corresponding investment year.

The popularity of index annuities have grown in recent years because insurance companies started enhancing the product with "Principal Protection". This means if the market went down, you're investment could never be worth less than what you invested. Of course, there is a catch. The catch is Principal Protected Index Annuities have an upside cap. This cap limits your gains to 2-3% a month, and is cumulative. This means if one month the index looses 3%, and the next month gains 4%, you would still be at a zero return because your monthly cap was 3%.

All in all, you may limit your upside, but your downside is protected. In the long run, the index annuity should outperform SPDA's or fixed annuities, but may underperform the actual indexes.
If your looking for a way to participate in the stock market with no downside risk, modest upside appreciation, and tax deferral, Principal Protected Index Annuities may be for you.

5)TAX SHELTERED ANNUITY (TSA)- A TSA is basically a retirement plan that is maining offered to school teachers and hospital workers.TSA money is usually deposited monthly and is extracted from the pay of employees on a pre-tax basis.TSA's offer a broad choice of investment vehicles similar to a variable annuity. Of these choices, the investor has to choose what investments he/she wishes to own.

Most human resourse offices can provide you with information on how to allocate you investments. To simplify the process, you can simply go to the REPORTS section of my website, and click on the "How to be Your Own Broker" report. Complete the questionaire, and follow our suggested asset allocation suggestions.

COMMISSIONS/FEES

The difference between the annuity and other investments is that in most cases, annuities carry the highest commission percentage of them all, which is why brokers and insurance agents love them so. Usually the fee that the person "earns" by selling you an annuity is around 5% to 6%. In some cases, it can be higher and in others lower.

Annuities are becoming less restrictive than in the past. Annuities can now be purchased without tying up your money for long periods of time, and have no declining sales charge. All Fixed Annuities have penality periods, so there is no flexibility there. But you can take comfort in knowing that 100% of your money is invested immediately, and nothing comes out of your pocket. Also, there are no ongoing fees associated with Fixed Annuities.

Annuities offer many advantages for investors, but like anything else, you have to know what you池e doing.

If you池e interested in annuities, do business with an independent financial advisor that is not compensated for what he/she sells, but charges a quarterly fee to properly allocate and monitor your assets. If you do business with a broker or insurance agent, more than likely they are going to recommend an annuity that pays them upfront and has a declining sales charge or penalty period. If you must deal with a broker/agent, insist on a 渡o penalty, no backend� sales charge annuity.