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Annuity Basics

In today’s world, an annuity is a popular way to accumulate or hold money for and during retirement.

Let us explain the tax advantages and other benefits of annuities, and introduce you to our exciting annuity portfolio.

"What is an annuity?"
An annuity is a financial product that accumulates interest on a tax-deferred basis. It provides systematic payouts over a period of time based on various retirement income schedules. An annuity is typically used for saving for a long term goal – such as retirement - and it should not be bought for short-term purposes. Much of the popularity of annuities is due to the favorable tax treatment. Unlike interest on savings accounts and dividends from stocks and mutual funds which are taxable in the year earned, interest credited on a deferred annuity is not taxed until it is withdrawn.

Types of Annuities:
Annuity contracts vary in a number of ways. The following are some of the ways annuities differ and are commonly categorized.

  1. When Benefits are Received.
    Annuities may be either immediate or deferred. Immediate annuities provide income payments that start shortly after you pay the premium. Deferred annuities provide income payments that start at a later date. The main reason for buying an immediate annuity is to obtain an immediate income, most frequently during retirement for those who want to receive a set amount on a recurring basis. A deferred annuity accumulates money on a tax-deferred basis, which can then provide an income either in a lump-sum or as recurring payments at a later date.
  2. How Premiums Are Paid.
    Annuities may be either single premium or flexible premium. Single premium contracts allow you to pay the company only one premium. Flexible or periodic premium contracts are designed to allow multiple premium payments. You pay as much as you wish whenever you wish, within specified company limits.
  3. How interest is credited
    In addition to when benefits are received and how payments are made, there are different ways that annuities may Annuities may be fixed, indexed, variable, or a combination.

Fixed Annuities
National Western Life declares guaranteed rate of interest for a specified term.

Fixed-Indexed Annuities (FIA)
Fixed indexed annuities have interest that is linked in part to growth in the equity market as measured by an index such as the S&P 500®. The owner enjoys the upside potential of equities, but is not exposed to the downside risk. Subject to fixed minimum guarantees, the value of a fixed indexed annuity will never decline due to index movement.

National Western Life offers a variety of fixed and fixed-indexed annuities including:

Variable Annuities
Variable annuities offer a variety of investment options, typically mutual funds. The value and growth of the variable annuity is dependent on the performance (whether positive or negative) of the underlying investments.


Before buying ask these Questions,

  • How much annuity income will I need and for how long??
  • When will I need access to the funds?
  • Do I have an emergency fund set aside to meet my other obligations?

Be certain you understand,

  • How the value of the annuity is determined.
  • All of the liquidity options available to you.
  • Any tax benefits or implications of the annuity.

How do I buy an annuity?

Buying an annuity contract is a major financial decision which should be considered carefully. Here are a few points to consider:

  1. Be certain you understand all charges that will be made and how they may reduce the value of the annuity.
  2. Be certain you can afford the premium payments.
  3. Check whether the annuity contract allows you to change the amount and frequency of your premium payments. Find out what happens if you stop paying premiums.
  4. You may want to obtain and compare Contract Summaries for similar contracts from several companies. Comparing these should help you in your selection.
  5. If you are buying an annuity contract for an Individual Retirement Account (IRA), Roth IRA, or another tax deferred retirement program, make sure that you are eligible. Make sure that you understand any restrictions and tax implications connected with the program.
  6. If you are shown a presentation, which illustrates tax savings, be sure the assumptions, such as the tax bracket, apply in your case.
  7. Some companies offer deposit fund arrangements with their life insurance policies or annuity contracts. These arrangements allow you to pay amounts in addition to your premiums that will be accumulated at interest in much the same way as under a deferred fixed annuity contract.

What is the tax advantage of an annuity?

Popular Advantages of Tax-Deferred Annuities
Much of the popularity is due to the favorable tax treatment Congress provided for annuities. Interest on savings accounts, dividends from stocks and rental income from real estate is immediately taxable in the year earned. In contrast, interest credited on a deferred annuity is not taxed until it is withdrawn.

Tax-Deferred Compound Growth
Because taxes are deferred until money is withdrawn, interest is earned on dollars that would otherwise be paid to the IRS. This results in greater financial growth than an identical payment a taxable instrument would produce.

Tax Timing
In addition to deferring taxes and earning interest on money which would otherwise be paid as taxes - you may also exercise some control over the timing of taxation.

In early retirement years, you may have sufficient income from qualified retirement plans, rental income, or part-time work. If you don’t need additional income from the deferred annuity, or if you want to delay taxation until later retirement years when taxable income may be less, distributions can be simply postponed. Of course, IRS minimum distribution requirements must be met with a qualified annuity.

Withdrawal Flexibility
You not only have the flexibility to choose when you begin withdrawals, but the flexibility to choose how:

  • As a lump sum distribution less withdrawal charges;
  • As an income for a specific number of years;
  • As an income for as long as you live;
  • As an income for as long as you or your spouse live.

This flexibility also means decisions don’t have to be locked-in today which might prove inappropriate years from now.