Annuities, usually tax-deferred investment vehicles, are contracts between an insurance company and the investor, the individual purchasing the annuity. These contracts, in theory, are typically simple: In return for a sum of money, generally referred to as the premium, the insurance company makes guarantees to the investor. Examples of these guarantees are:

  • Guaranteed1 interest rates for guaranteed periods of time;
  • Guaranteed1 return of principal, meaning that the investor will receive at least as much as they invested, regardless of circumstance; and
  • Guarantees1 that the investor will never receive less than a minimum interest rate while the money is invested with the insurance company, regardless of how low interest rates may go.

Many features are determined by insurance law and may tend to be similar from one contract to the next. Other contract features will be determined at the discretion of the insurance company offering the product, so they may differ from one annuity to another.

First Midwest Financial Network* offers access to a wide range of annuities from a variety of carefully selected providers. Call 800-241-1749 to get connected with a Financial Consultant to determine if an annuity is the appropriate investment for you.

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Annuities in Everyday Life

Annuities are all around us, although their existence may not be immediately obvious. When prizes are awarded for state lottery drawings, such as a $1 million prize paid over 20 years, the payment vehicle is an annuity. The state lottery commission makes a single payment to an insurance company in return for the insurance company making ongoing annuity payments.

When people retire and begin receiving their pensions, corporations purchase annuities to fund the pension payments. When large court settlements are awarded, such as to a child who was severely injured in an accident, the awards are usually made as annuities, referred to as structured settlements. As you can see, annuities are already in widespread use and have been for many years.

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Types of Annuities

The distinguishing characteristics of different types of annuities generally fall into three categories:

It should be noted that all annuities combine these features in some manner.

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Tax-Deferred Annuities

A tax-deferred annuity is a non-negotiable interest-bearing contract offered by an insurance company. Tax-deferred annuities have two distinct phases: the accumulation phase, and the payout phase, which is also called "annuitization."

During the accumulation phase, interest earnings are retained in the account so the account balance grows. During the payout or annuitization phase, proceeds from the account are paid out or distributed in one of many ways.

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Immediate Annuities vs. Deferred Annuities

Payments from an immediate annuity begin from one to three months after it is purchased. Most payments are made monthly, but many insurers also allow quarterly, semiannual or annual payments. Immediate annuities are most appropriate for individuals who are in immediate need of a stream of regular income. A deferred annuity delays payments until some point in the future, with an accumulation period during which the annuity grows in value.
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Single-Premium Annuities vs. Flexible-Premium Annuities

A single-premium annuity is purchased with one lump-sum payment. There are no subsequent premium payments. Immediate annuities must be purchased in this way. A flexible-premium annuity is purchased through an initial minimum payment, after which additional payments of a certain minimum amount may be made at the option of the contract holder. This flexible premium payment plan is attractive to investors who want to gradually accumulate increasing value in an annuity.
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Fixed Annuities vs. Variable Annuities

A fixed annuity guarantees a minimum fixed rate of return. A fixed annuity also may guarantee a higher rate of return for a certain period. At the expiration of that period, the contract may guarantee a different rate of return for another defined period. Fixed annuities are guaranteed contracts – the insurance company guarantees that it will fulfill its obligations to the annuity owners. This guarantee is backed by the full faith and credit of the insurance company offering the annuity (however, there is no government guarantee, such as the FDIC, associated with annuities). Fixed annuities are not considered securities and are not regulated by the SEC.

In contrast, with variable annuities, investors can choose where to invest the money they put into the annuity, from a range of different underlying investment options, typically called subaccounts. This means the rate of return and the amount of the periodic payments investors eventually receive will vary, depending on the performance of the underlying investment options selected. Variable annuities are securities and are regulated by the SEC.

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Variable and fixed annuities are long-term, tax-deferred investment vehicles designed for retirement purposes, but the variable annuities contain both an investment and insurance component and carry insurance-related charges. Variable annuities are sold only by prospectus. Guarantees are based on claims paying ability of the issuer. Withdrawals made prior to age 59 1/2 are subject to a 10% IRS penalty tax, and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available subaccount portfolios will fluctuate so that the value of an investor's unit, when redeemed, may be worth more or less than their original value.

Investors should consider the investment objectives, risks, charges and expenses of the variable insurance contract and subaccounts carefully before investing. The prospectus contains this and other information about the variable insurance contract and subaccounts. You can obtain contract and underlying subaccount prospectuses from your financial representative. Read the prospectuses carefully before investing. 

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