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Learn More about Annuities Buffalo NY

Annuities are intended to help you save for retirement and supplement your retirement income. To encourage this practice, Uncle Sam lets you defer taxes on the growth of your annuity. And to discourage you from spending your annuity assets before retirement, the IRS penalizes you for any withdrawals from annuities and other tax-deferred investments before you reach age 591⁄2.

Local Companies

First National Credit Inc
(716) 827-9768
1169 Harlem Rd
Buffalo, NY
Keybank
(716) 822-2848
2157 Seneca St
Buffalo, NY
Wachovia Securities Financial Network
(716) 332-7168
534 Delaware Ave
Buffalo, NY
M & T Bank
(716) 824-0571
2199 Seneca St
Buffalo, NY
M & T Bank
(716) 631-9731
5225 Transit Rd
Buffalo, NY
Keybank
(716) 674-6600
40502 Seneca St
Buffalo, NY
Citizens Bank
(716) 874-7296
1698 Sheridan Dr
Buffalo, NY
Charter One Bank
(716) 348-8500
3180 Sheridan Dr
Buffalo, NY
M & T Bank
(716) 635-4000
1 M and T Plz Ste 1
Buffalo, NY
M & T Bank
(716) 834-5745
3037 Bailey Ave
Buffalo, NY


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For Dummies is a registered trademark of Wiley Publishing, Inc. in the United States and other countries. Used here by license.



Seeing How Annuities Work

Annuities are intended to help you save for retirement and supplement your retirement income. To encourage this practice, Uncle Sam lets you defer taxes on the growth of your annuity. And to discourage you from spending your annuity assets before retirement, the IRS penalizes you for any withdrawals from annuities and other tax-deferred investments before you reach age 591⁄2.

Various types of annuities can make your retirement more secure by helping you:

  • Save for retirement. Before you retire, fixed deferred annuities (including CD-type annuities, market value-adjusted fixed annuities, and indexed annuities) allow you to earn a specific or adjustable rate of interest on your money for a specific number of years, tax-deferred. They’re also a safe place to park money during retirement.

  • Invest for retirement. Before you retire, variable deferred annuities (a basket of mutual funds, essentially) allow you to invest your savings in stocks or bonds and still defer taxes on all the capital gains, dividends, and interest that mutual funds usually throw off every year.

  • Distribute your savings. Most baby boomers who retire with six-figure balances in their employer-sponsored retirement plans aren’t sure how fast or slow to spend their savings. An immediate annuity or a variable deferred annuity with guaranteed lifetime benefits can provide structure to the process.

  • Insure against longevity risk. Just as life insurance insures you and your family from the risk of dying early, an income annuity or an advanced life deferred annuity (ALDA) can insure you against the risk of living so long that you run out of money.

  • Manage your taxes. Everybody with a big 401(k) or 403(b) plan will retire with a massive income-tax debt to the government. A life income annuity allows you to spread that tax liability evenly across your entire retirement.

    The strength of an annuity’s guarantee depends on the issuer’s ability to pay you back. Every insurance company receives ratings for financial strength from the major rating agencies (A.M. Best, Fitch, Standard & Poor’s, and Moody’s Investors Services). Note: Do business only with carriers who have an all-A rating. (See Appendix A for more on these ratings.)

    Note: To understand the functions of annuities better, you need to look at the types of annuities — and there are several.

    Like some other vital commodities (think air, gasoline, or even money itself), annuities are both ubiquitous and invisible. You don’t smell, hear, or taste annuities, yet they’re all around you. For example:

  • Social Security benefits, pensions, and structured settlements of personal injury lawsuits are all annuities.

  • Many state lottery jackpots are paid out as annuities.

  • Thousands of university employees contribute part of their paychecks to group retirement annuities.

    But the annuities in this list aren’t the focus of this article. Instead, I focus on the individual annuities that people purchase from insurance companies or their designated representatives. Here’s a rough description of the sales process:

    You probably buy your annuity from a licensed insurance agent, broker, or financial adviser. Standing directly behind these intermediaries are brokerage firms (for brokers and financial advisers), marketing organizations (for independent insurance agents), or the insurance companies themselves (in the case of career insurance agents). Note: Insurance agents aren’t licensed to sell variable annuities.

    The transaction includes these steps:

    1. You meet with the agent or broker to discuss your finances and choose a suitable product.

    2. You complete an application and the agent or broker submits it to the contract issuer for approval.

    3. After your application is approved, you send the contract issuer a check for the minimum amount (every carrier sets its own minimum initial premiums) or more.

    4. The carrier sends you your contract.

    You have 10 to 30 days to reconsider your decision and send the contract back for a refund.

    5. If you decide to keep the annuity, put the contract in a safe place. Shoeboxes, filing cabinets, desk drawers, and safe-deposit boxes are among the preferred destinations (but not necessarily in that order!).

    Important participants in the annuity food chain include:

  • Annuity issuers: Only insurance companies issue annuities. Hundreds of issuers are out there, but the 25 largest firms — household names like The Hartford, MetLife, and Prudential — account for about 90 percent of all annuities sold each year.

    Some insurers are publicly owned and some are mutually owned. The two types may have different cultures, attitudes, and slightly different products:

  • Publicly owned firms are owned by their stockholders.

  • Mutually owned firms are owned by their customers.

    Look for a company whose view of risk and reward matches your own.

  • Annuity distributors: Distributors serve as middlemen between the carriers and the producers (see the next bullet). In many cases, they employ or supervise the producer, making sure the producer complies with insurance and investment laws. Distributors include

  • Wirehouses (Large, established full-service brokerages like Merrill Lynch and Morgan Stanley; so called because their ancestors were among the first to use the telegraph or “wire”)

  • Independent broker-dealers like Raymond James and LPL (Linsco/Private Ledger) Financial Services

  • Banks like Bank of America and Wachovia that sell annuities through their branches

  • Annuity producers: Years ago, most insurance companies employed an army of career agents to represent their products. Although carriers like AXA Equitable, New York Life, and others still employ these “captive” agents, many insurers now rely entirely on independent agents, brokers, and bank officers to sell their annuities.

    These independents can recommend any annuity they want. In practice, they may steer you toward their list of preferred products or carriers. Be aware that a producer may earn a higher commission or a free trip to Cancun for selling certain products. Feel free to ask the producers about their rewards.

  • Direct marketers: Some (but not all) insurance companies sell no-load (that is, no sales commission) contracts directly to the public. If you’re the self-reliant type and don’t need an agent or broker to explain annuities to you, you can buy your annuity direct and save that added commission cost.

    No-load mutual fund companies like Vanguard, Fidelity, and T. Rowe Price also sell no-load annuity contracts over the phone or Internet or by mail. Their contracts are issued by third-party insurance companies.

    Relatively few people buy annuities direct. Most people need intermediaries to explain annuities and help them choose the right one. There’s nothing wrong with that. But you can save big by cutting out the salesman.

    Putting money into an annuity is relatively easy. Getting money out is “sticky” — that is, more complicated.

    Annuities are “sticky” for a reason. The benefits of fixed deferred annuities, variable annuities with guaranteed living benefits, and income annuities all depend on your agreement not to touch your money for a while. To discourage you from taking out your money until the “cake is baked,” in a sense, insurance carriers and the government both charge fees or levy penalties on early withdrawals.

    But insurance companies and the IRS aren’t totally inflexible about withdrawals. For instance, you can withdraw 10 percent of most fixed annuities every year without a penalty. The newer income annuities allow emergency lump-sum withdrawals and provide for almost unlimited withdrawals to pay for nursing home care. You can tailor an income annuity so that, if you die before receiving at least as much as you paid for your annuity, your beneficiaries will recover the difference.

    Think of annuities as the financial world’s version of the platypus, the egglaying mammal that’s part duck, part beaver. They’re neither pure investments nor pure insurance; instead, they have one foot in the investment world and one foot in the insurance world. I’ve also heard them compared to the Osprey — an aircraft that can hover like a helicopter and fly like a plane.

    Ospreys don’t hover as well as helicopters and don’t fly as well as planes, but no other vehicle in the world does both. Similarly, annuities aren’t the most lucrative investments and they don’t insure you against every financial disaster. But, for the right candidate, they can offer an attractive blend of earnings and safety that few other readily available financial products can match.

    An annuity is an investment because you give a sum of money to a financial institution with the hope that you’ll get back more than you put in. Your investment — in this case, a premium — can range in size from $2,000 to over $2 million. The financial institution, usually an insurance company, puts your money in its general account (if you buy a fixed annuity) or in a separate account (if you buy a variable annuity).

    An annuity is also insurance because a small portion of your premium buys a guarantee (the exact nature of the guarantee varies with the type of annuity). For example:

  • In fixed annuity contracts, your guarantee is the rate of return for a certain number of years.

  • In the latest variable annuity contracts, your guarantee is the locked rate of return.

  • With an immediate annuity, the guarantee is your income.

    Annuities are all about trade-offs between risk and return. The guarantees reduce your risk of losing money, but the fee for the guarantee generally reduces the potential growth of your investment. Note: That’s not always the case, but the principle holds true — lower risk brings lower returns.

    If anybody tries to convince you that an annuity lowers your risk without curtailing your potential return, put your hand on your wallet and slowly back away. There are no free lunches.

    Survivorship credits — the unique aspect of annuities
    When you buy an annuity for lifetime income, you throw your money into a pool with money from thousands of other annuity owners your age. This is mortality pooling; Social Security and corporate pensions are based on the same principle.

    With annuities, an insurance company puts the money into its own interest-bearing account or into a separate account where your money goes into subaccounts (mutual funds) that a professional fund manager oversees. All owners then take an annual income from that pool.

    Each month (or quarter, if you prefer) you receive a payment consisting of three elements:

  • A little bit of your principal

  • A bit of the pool’s investment growth

  • A bit of the money left behind by fellow annuity owners who have died

    This amount is your survivorship credit or mortality credit.

    Of course, this income depends on (is “contingent upon,” the lawyers might say) certain circumstances:

  • If you die early, you may not receive as much as you put in.

  • If you live exactly to your life expectancy, you get back exactly what you put in, with interest.

  • If you live past your life expectancy, you get back much more than you put in.

    True annuities serve two purposes: They guarantee you an income for life (or a specific number of years), and they maximize your income rate while you’re alive.


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    For Dummies is a registered trademark of Wiley Publishing, Inc. in the United States and other countries. Used here by license.

    • Featured Local Company

    Annuity Specialists

    1-877-565-5400
    20 Panorama Trail
    Rochester, NY

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