Annuity Basics

An annuity is a contract between an insurance company and a policyholder, providing a string of payments based on the premium paid, contract length, and the annuitant’s life expectancy or a pre-determined payment period. There are many different types of annuities, including:

Single Premium Immediate Annuity
A policyholder invests a single lump sum at the beginning of the contract. At that time a fixed monthly payment is “locked-in” and the investor receives that dollar amount every month until they die, or up to an agreed-upon point after they die. The amount of the payment is determined by the initial investment, the age of the policyholder, and the point up to or following death at which the monthly payments will cease. At the end of the contract, payments stop. The initial investment is not returned. A portion of the income stream is tax-free, based on the premium amount invested and the correlating exclusion ratio.

Single Premium Deferred Annuity
A policyholder invests a single lump sum at the beginning of the contract. At that time, a fixed rate of return and contract period is “locked-in.” Unlike an immediate annuity, however, monthly payments do not start at that time. Instead, the investor receives a fixed amount at the end of the contract period. Taxes are deferred until money is withdrawn. At the end of the contract, the policyholder may choose to begin receiving annuitized scheduled payments or continue to hold the contract (varies by contract).

Variable Annuity
Policyholders invest a single lump sum at the beginning of the contract. Policyholders are then allowed to hold and trade investment options within the annuity’s sub-accounts without paying taxes on gains until money is withdrawn. This allows the policyholder to participate in the equity and fixed income markets and choose between various types of investment alternatives. Therefore, variable annuities involve more account fees/expenses and investment risk than fixed annuities.

Fixed Indexed Annuity 
This insurance product invests in a tax-deferred accumulation vehicle that shares features with fixed deferred interest rate annuities; however, with an index annuity, the annual growth is bench-marked to a stock market index (e.g., Nasdaq, NYSE, S&P500) rather than an interest rate. It may give you more growth potential than a fixed annuity, along with possibly less risk and less potential return than a variable annuity.

Investors Who May Want to Consider Annuities

  • People currently in a high tax bracket that anticipate being in a lower tax bracket when they retire
  • Those who want to guarantee a return and use the investment to generate income in the future
  • People interested in investing in the stock market but want principal protection

What Northland Provides

  • Guidance through the many complicated annuity options
  • Access to an array of different annuity options from quality insurance provider companies
  • Complimentary annuity policy reviews, to consider the structure, expenses, subaccounts, and tax consequences of existing annuity contracts you may have in place, in order to create more affordable or comprehensive contract coverage or efficiencies.

Northland Securities offers a wide array of fixed and variable tax-deferred annuities to meet your retirement income and portfolio protection needs. Please consult with a Northland Securities Representative for a review of your existing tax-deferred annuity benefits.

Contact a Northland Wealth Management specialist to learn more

Variable annuities are offered by prospectus, which provides information including benefits, fees and expenses. Annuity and Insurance products are guaranteed, underwritten, and issued exclusively by, the respective insurance companies. Penalties may apply for early withdrawal, and a 10% IRS penalty may apply for withdrawals prior to age 59½. Northland Representatives do not provide tax or legal advice: Consult your tax or legal advisor for specific information.