Raffel Financial Services, LLC

19105 N. 85th Lane

Peoria, AZ 85382-8715


(623) 266-9362 Office

(623) 521-8008 Cell

(623) 251-4066 Fax



Annuity Overview

An annuity is a contract between you (the annuity owner or “annuitant”) and an insurance company. Under this contract, you agree to give the issuer principal and in return the issuer guarantees you payments over time or a lump sum pay-out at some future time. While annuities are not insurance policies, they are issued by insurance companies.

An annuity is similar to a retirement plan in that you can fund it in a lump sum or a little at a time, and all capital in an annuity can grow and compound tax-deferred until you begin making withdrawals. Unlike retirement plans, however, there is generally no limit on how much you can invest in annuities. Annuities can provide tax-deferred growth for lower current income taxes and only an annuity can provide a guaranteed income stream that the annuitants can’t outlive!

There are large number of annuity products available but in fact there are only a handful of different types of annuities. When selecting an annuity, you will be presented with essentially three choices:

Timing of payout -- Immediate or deferred: In an immediate annuity, the investor begins to receive payments immediately upon investing; this is for investors who, for example, want to receive guaranteed monthly income payments for the rest of their life. A deferred annuity earns interest on the principal over a typical term of five to fourteen years before the investor receives either a lump sum payment or recurring income payments.

Investment type -- Fixed or variable: Fixed annuities are invested primarily in government securities and high-grade corporate bonds and they offer a guaranteed rate of return. Variable annuities enable you to invest in a selection of sub-accounts, such as securities. These sub-accounts are usually tied to stock market performance and are often invested in a basket of mutual funds. Variable annuities offer the largest potential for gain but also can decline in value during a down market cycle.

Liquidity options -- Most annuities allow you to withdraw your interest earnings or up to 10% per year of your principal without a penalty; although any withdrawal from an annuity may be subject to a 10% federal penalty if taken prior to age 59˝. Most deferred annuities have a surrender charge -- a penalty for making an early withdrawal above the free withdrawal amount. Typically the percentage amount of this surrender charge decreases each year during the deferred term.

Equity indexed annuities offer the security of a fixed rate along with the opportunity to link interest rates received to the Dow Jones Industrial Average or the Standard & Poor’s 500 indices. When you buy an equity indexed annuity you own an insurance contract; you are not buying shares of any stock or index fund. An equity indexed annuity credits interest to your annuity's value using a formula based on changes in the particular index to which the annuity is linked. The formula determines how the additional interest is calculated and credited; how much additional interest you receive and when you get it depends on the features of your particular annuity. An equity indexed annuity, like other fixed annuities, also guarantees paying a minimum interest rate that will be applied, at the end of the deferred term, even if the index linked interest rate is lower. The value of the annuity will not drop below the guaranteed minimum and the principal that is invested will never be reduced as a result of a decline in the stock market. Thus, you win when the stock market goes up and you don't lose when it declines!

In general, an annuity should be considered for its ability to build tax-deferred earnings from otherwise taxable investments such as mutual funds and CD's. An Equity Indexed Annuity will permit participation in stock market gains while protecting the principal from market declines.

There are several reasons to consider an an annuity because it can provide:

·    Guaranteed income. An annuity can provide a guaranteed lifetime income, regardless of how long you live. No other investment instrument can provide this guarantee.

·    Unlimited contributions. Unlike other tax-advantaged investments, such as IRAs, you can generally contribute an unlimited amount of money to an annuity, whether in periodic installments or a lump sum.

·    Bonus rates. Some annuities award investors with bonuses -- extra interest that further increases your investment -- at the end of your annuity's first year. The bonus increases the annuity's principal on which future interest will be calculated in subsequent years, thus providing a boost to the ultimate value of an annuity fund.

·    No risk of loss ("fixed" annuities). Unlike investments in stocks or mutual funds, principal invested in an annuity is not at risk due to market declines.

·    No-penalty annual withdrawals. Most annuities have a provision that allows you to withdraw up to a certain amount per year (usually 10%) penalty free.

·    No-penalty rollovers. Company pension or profit-sharing plan payoffs may be reinvested without incurring current taxes or penalties.

·    No probate in case of death, as long as you specify beneficiaries. Which means your family will find it easier and less costly to obtain the value of the annuity.

·    No initial sales charges ("no load") or annual fees. Annuities are generally no-load, no-fee investments, which means more of your money is actually invested.

·    Shelter investment earnings. Retired people can use annuities to shelter investment earnings that would otherwise lead to taxation of their Social Security benefits.