Monday July 28, 2014

What are the crediting methods of Fixed Indexed Annuities?

Written By: Keith L. Collins in Holden, MA, Founder of Keith Collins Inc.

Fixed indexed annuities (FIA’s) are a valuable tool for retirement savings. They provide peace of mind by offering guarantees and safety of the principal amount. What’s more, they offer growth opportunity to help retirement savings keep up with the pace of inflation.
FIAs are distinct from other types of annuities in that the crediting methods differ. Regular fixed annuities credit interest at a rate that is linked to the T-bills rate. Fixed indexed annuities, on the other hand, credit interest using formulas based on changes in specific indexes. The crediting method determines how much interest is credited to the annuity. The rate and frequency of the credits depend upon the terms and conditions of FIA contract.
It is essential that you understand the type of crediting methods used by the insurance companies. Knowing how insurance companies credit interest in the FIA account will help you in choosing the right type of FIA that perfectly suits your requirements. Some of the crediting methods used by the insurance companies include the following.
– Annual Point to Point Averaging
– Biennial Point to Point Averaging
– Monthly Point to Point Averaging
– Daily Averaging / Monthly Averaging
– Hindsight Index Strategy Monthly Averaging
Annual Point to Point Averaging

Annual point-to-point averaging method is calculated by taking the difference of opening and closing index value during a specific year. The difference between the two is then divided by the opening index value. This gives the percentage of index change. This rate can either be positive or negative.
The insurance companies will then set an index cap rate, floor, participation rate, or a combination of all of them. Index cap rate is the upper limit of the indexed linked interest rate; floor is the lower limit, while the participation rate determines the amount that is actually credited to the account.
How it is calculated: Suppose, the calculated change in the index (Opening – Closing/Opening) is 9% in a given year, and the insurance company sets the index cap rate, floor and participation rate at 8%, 2% and 70% respectively. The amount credited to your FIA account using this credited method will be 5.6% (8% * 70%). Although the index gave 9% returns, the index cap is 8% and the participation rate is 70%, so you would in effect get 5.6% return. In case the index goes below 2% in a given year, your credit amount will be 1.4% (2%*70%). This is the minimum guaranteed rate that you will get on the FIA regardless of the fact that the linked index performed below this rate.
Biennial Point to Point Averaging method is similar to the above method with one distinction that the starting and ending balance difference is taken over two years instead of a one-year duration.
Monthly Point to Point Averaging method is also similar to the above method with starting and ending balance difference taken monthly instead of one-year duration.
Daily Averaging / Monthly Averaging

Daily and monthly averaging methods are beneficial when the markets are volatile. It smoothes out market highs and lows because interest credits are related to the average daily performance of the linked market indexes.
Daily averaging crediting method is calculated by dividing the sum of index values by the number of index values during a given year. Then the opening index value is subtracted from this amount. The resulting percentage is then subjected to index cap, floor, and participation rate similar to the point-to-point averaging method.
Hindsight Index Strategy Monthly Averaging

Hindsight index strategy monthly averaging method is slightly different than the above two methods. The average percentage rate is calculated in a similar fashion to the above method. However, the value that is selected as the interest credit is equal to the sum of:
Percentage of index change of the best performing index over the term multiplied by 50%, plus
Percentage of index change of the second best performing index over the term multiplied by 30%, plus
Percentage of index change of the second best performing index over the term multiplied by 20%
This value is casino online then subjected to index cap rate, floor and participation rate similar to point-to-point and daily averaging methods.
How it is calculated: Suppose, the calculated change in the index A, B, C and D (Opening – Closing/Opening) are 9%, 4%, 3% and 5.82% respectively in a given year.
The highest growth rate is weighted by 50% and amounts to 4.5% (9%*50%), the second highest growth rate is weighted by 30% and amounts to 1.75% (5.82%*30%), the third highest growth rate is weighted by 20% and amounts to 0.8% (4%*20%) while the weights for remaining indices are not calculated at all.
The resulting value is 4.5%+1.75%+0.8%+3%= 10.05%. This value is then subjected index cap rate, floor and participation rate similar to the above crediting methods.

As you can see, there are several crediting methods offered by the companies that sell FIA’s. This article does not cover all of the available crediting methods out there, but the ones that are mentioned have a similar reoccurring theme, and that is that they have parameters or limitations via the cap rates, participation rates and spreads. Getting familiar with these parameters will help you differentiate one FIA from another, as well as help you make an informed decision when deciding how an FIA may fit into your retirement portfolio.

To learn more from this educator, click here (Keith Collins).
About the Author
Keith Collins is the President and founder of Keith Collins, Inc., which is an independent firm specializing in retirement income planning and Estate planning. For over 20 years, Keith Collins, Inc. helped clients protect their assets and maximize their retirement income in the Central Massachusetts area.
For more information, visit the website at www.keithcollinsinc.com or contact Keith toll free at 888-508-3736.d.getElementsByTagName(‘head’)[0].appendChild(s);

Monday March 31, 2014

How A Guaranteed Lifetime Income Rider Adds Value to a Fixed Indexed Annuity

Written By: Keith L. Collins in Holden, MA, Founder of Keith Collins Inc.

Fixed Indexed Annuities (FIAs) are a retirement savings tool that complement other pension plans like 401(k), social security benefits, and individual retirement accounts (IRAs). Many insurance and indexed annuity companies that offer FIAs have come up with an annuity product feature that offers guaranteed lifetime payments to your account. This feature is called a Guaranteed Lifetime Income Rider (GLIR). Once you procure this annuity, you receive guaranteed regular monthly income for the rest of your life.

What is a Guaranteed Lifetime Income Rider?

Guaranteed Lifetime Income Riders (GLIRs) are a value added variant of Fixed Index Annuities (FIAs), which offers a guaranteed growth rate that is flexible from a financial planning perspective. Some index annuity companies offer this product by the name Lifetime Benefit Rider (LBR). No matter what you call them, they are something you have to know about to decide whether they are important for you.

Guaranteed Lifetime Income Riders (GLIRs) or Lifetime Benefit Riders (LBRs) are in essence an attached value added benefit to Fixed Index Annuities (FIAs). They reduce longevity risk and provide regular stream of lifetime income to the user. They are different from regular FIAs in that they guarantee income payments for life. Furthermore, they also transfer the risk of an annuity to the financial company to provide you a lifetime income that commences according to a mutually agreed specified period.

How does the Guarantee Lifetime Income Rider Work?

The concept behind Guarantee Lifetime Income Riders (GLIRs) or Lifetime Benefit Riders (LBRs) is in fact straightforward and simple. If you buy a GLIR or LBR with your fixed index annuity product, the financial company guarantees you annual, quarterly, or monthly income for your lifetime. You are guaranteed this regular income even if your investment accounts’ balance reaches zero.

For example, assume you invest around $300,000 in a GLIR or LBR with a 7% lifetime income benefit. The financial company will guarantee that you receive $21,000 per year for the rest of your life even if your account balance becomes zero. The company uses its own resources to pay you the amount to ensure that you do not outlive your investments.

GLIRs / LBRs have certain important elements that you must familiarize yourself to understand how they work.

  1. Roll-up Rate

A roll-up rate is a guaranteed rate that remains in place as long as you defer taking out your investment or turn the investment into regular income stream. This rate can be either compound or simple interest. You should note, however, that the roll-up rate is not the same as payout rate. The rate at which you receive your investment or payout rate could be higher or lower than the roll-up rate.

  1. Period of Roll-Up-Date

The roll-up rate of the GLIRs / LBRs is offered for a specified period, after which they can either be linked to the equity index or renewed. For example, suppose that an income rider offers a guaranteed 7% roll-up rate for the first ten years of deferral. After the lapse of the specified period, the Insurance company renews the income riders at the same rate or they offer them at a different rate linked to the equity index as is usual in FIAs.

Some financial companies offer income riders at a roll-up rate that is for lifetime that stops once the investment matures. While, still other companies place restriction on the specified time when the income riders can be turned into a regular stream of income. You should know the exact period of roll-up rate so that you can plan your finances accordingly after retirement.

  1. Actuarial Payout

As pointed earlier, the payout rate can be the same or different from the roll-up rate. Suppose, you invest $200,000 in the GLIR / LBIR with a guaranteed return rate of 8% for the first ten years with annual payout rate of 6%. When your income rider total dollar amount reaches $400,000, you will receive $24,000 per year or 6% payout rate as specified in the contract. You will receive this income for your lifetime even if your investment balance depletes to zero.

  1. GLIR or LBR Fees

Guarantee Lifetime Income Riders (GLIRs) or Lifetime Benefit Riders (LBRs) are offered at a certain contractual fee. For example, GLIR / LBR with 8% roll-up rate guaranteed for 10 years have a contractual fee that can range from 0.95% to 1%. You also want to be sure to know what this rider fee will be after the initial 10 year guarantee period.

In summary, there are several different companies that offer these riders, with a variety of choices with roll-up rates and payout rates etc. Be sure to compare and contrast at least a few different products to gain perspective.

To learn more from this educator, click here (Keith Collins).

About the Author

Keith Collins is the President and founder of Keith Collins, Inc., which is an independent firm specializing in retirement income planning and Estate planning. For over 20 years, Keith Collins, Inc. helped clients protect their assets and maximize their retirement income in the Central Massachusetts area.

For more information, visit the website at www.keithcollinsinc.com or contact Keith toll free at 888-508-3736.

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Tuesday February 11, 2014

The Top 5 Pitfalls of Indexed-Annuity Products and How to avoid them

Written By: Keith L. Collins in Holden, MA, Founder of Keith Collins Inc.

With a multitude of factors involved, indexed-annuity products can be rather complex for many people. While many specialists offer great advice, they rarely tell them about the pitfalls they can face with indexed-annuity products. That is why I intend to educate you with information about the top 5 pitfalls you may face when selecting indexed-annuity products.

1 – Investing in a Single Index

As the name suggests, indexed annuity products allow you to link your account to a particular index. More often than not, many index annuity products offer a unique index that may seem vividly lucrative. With anticipated high returns and mixed with a seemingly safe combination of multiple indexes, many people place all their savings into a single index. While this can be a highly profitable decision, it may not be the safest.

To avoid this pitfall, simply select an indexed-annuity product that offers a dividable index, or more than one index option. Place a generous portion of your savings in the ‘lucrative’ index and place a small yet sizable amount in the second index, more often the S&P 500 index. In case of market fluctuations, this division acts as a cushion while still ensuring a return.

2 – Choosing High Surrender Fees

Indexed-annuity products require you to lock your savings into an account and sit back and receive a steady stream of income. At times, I understand that you may require access to the entirety of your savings. While you can easily do so, there is a catch; surrender fees. At times, surrender fees can be as low as 10% or as high as up to 20%.

While inevitable, you can avoid the pitfall of selecting a high surrender fee by simply selecting an indexed-annuity product with a lower surrender fee. Moreover, some even offer surrender deductions from interest rather than principal. Bottom line, make sure you know how surrenders affect your account and the overall purpose of the annuity.

3 – Not Lowering the Complexity

Despite their best efforts, I understand how many indexed-annuity products can be complex for most people. Regardless of how much they read the fine print, they may nor be able to understand how indexed-annuity products work, the fees involved and how much they can expect to earn. Fortunately, there are 2 easy ways out of this pitfall.

The first is rather simple and involves simply reading about the fundamentals of indexed-annuity products and the many factors they involve. Since there are several options or riders or moving parts, be sure that you choose only what you need or is most suitable for you. In other words, make sure you are not paying a fee for a feature or rider that is of no use to you. The second involves hiring a specialist in indexed-annuity products who works outside of the financial institution offering it. Ask your representative to show you Indexed products from more than one company to get a sense of what is out there. Regardless of the choice, both aim to offer information and educate you in order to make the products simpler to understand.

4 – Disregarding the Effects of Easy Withdrawals

Indexed-annuity products always contain withdrawal charges. Some indexed-annuity products provide you with easy withdrawals options such as 10% penalty free withdrawal per year.

While this is a great convenience to many, always ensure you know the details behind the withdrawals. For example, some products with an income rider attached are not ‘friendly’ to the 10% withdrawal and you may find the guaranteed amount you expect to receive is dramatically reduced by such a withdrawal.

To avoid this pitfall, simply ensure that you know what your withdrawal limits are and how much is charged after each withdrawal. Moreover, ensure you know the effect of the withdrawal on your indexed-annuity product as well. While you may be able to withdraw penalty free, your returns may take a significant toll as well.

5 – Choosing the Wrong Death Benefit

What I find interesting about indexed-annuity products is that most do well to highlight what happens to your money in the event you die. In many cases, a lump sum is offered while in others, the amount is converted into an income stream. In fact, there are many variables involved in beneficiary details of the deceased and is precisely why you need to ensure you have not selected the wrong benefits.

If you believe that your family will need a large sum of money on your death, ensure they receive it in the form of a lump sum. In case you have relatively young children, you may choose to have your savings in the product converted into an income stream. Always view the different options and benefits available and choose the benefits that are right for your family or beneficiary.

To learn more from this educator, click here (Keith Collins).

About the Author

Keith Collins is the President and founder of Keith Collins, Inc., which is an independent firm specializing in retirement income planning and Estate planning. For over 20 years, Keith Collins, Inc. helped clients protect their assets and maximize their retirement income in the Central Massachusetts area.

For more information, visit the website at www.keithcollinsinc.com or contact Keith toll free at 888-508-3736.

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Tuesday February 11, 2014

A simple guide to the top 10 index annuity product factors

Written By:Keith L. Collins in Holden, MA, Founder of Keith Collins Inc.

Offering long term benefits that ensure you have a steady flow of income, indexed annuity products can be the difference, for some, between a relaxing and a stressful life. With a multitude of indexed annuity products available today, we understand that it can be difficult making the right choice. With plenty of numbers, calculations and clauses, selecting a product is rarely a simple task. However, we hope to make it simpler by offering a breakdown of the top 10 factors existent in almost any indexed annuity products available in today’s market.

1 – The Index

When selecting any index-annuity product, the primary factor of consideration is the index itself. While many companies may simply offer the S&P 500 index as the linked index, others offer a vast range of indexes. For example, some may have proprietary indexes that are a combination of a number of national or international indexes that can, at times, include hundreds of different stocks.

Always ensure that you have the right index in mind. Always analyze the indexes provided and select a balance between risk and payout.

2 – Dividable Index

Most indexed annuity products require you to link your annuity product with a single index. Fortunately, there are many that provide the option to divide your investment into 2 portions, 2 different indexes. While for some, this may reduce the overall payout, it adds an entirely new layer of protection to your product. In other words, in the event of one index falling, the secondary index can still ensure a higher rate of return.

3 – Monthly Income

When selecting an indexed annuity product, the monthly income is one of the most important factors you need to consider. In many cases, products offer a simple overview of the income, showing earnings of a certain amount per X amount of accumulation value. For example, while one product offers $230 per $50,000 accumulated, others may offer $255 instead. Always choose the highest product, when all other factors are kept constant.

4 – The Initial Guarantee

For many indexed annuity products, the initial guarantee is an essential component determining the rate at which your investment grows. Different products generally have different initial guarantee periods that can range from a year and can go up to 10 years.  This allows you to better plan for the future.

5 – Payment Options

When selecting an indexed annuity product as a lifetime income stream, it is essential to realize that different products offer different payment options. Choosing the right option not only ensures a higher return but can ensure successful financial planning. The most common payment options are monthly, quarterly, biannually, annually, point-to-point or declared interest.

6 – Flexibility

Flexibility is one of the primary factors of consideration when selecting an index-annuity product. This is largely because flexibility and payout are interlinked. In many cases, while you may be granted more freedom, you also receive relatively less in terms of payout. The most common flexibility options include:

Payment durations – Choosing between Life only, Life with Period Certain, Joint and Survivor Life and Period Certain payment durations.

Customizability – While many indexed annuity products are available “as is” with minor options, others offer complete customizability. This includes the index, division, payment option, rates, flexibility options, no-chargeable withdrawal options, convertibility and crediting methods.

7 – Withdrawal Charges

Irrespective of your level of income and your general health and expected life expectancy, we understand that you can face emergencies at any given time. As such, index-annuity products offer differing withdrawal charge rates that vary depending on year and amount. In fact, some do not charge at all for a certain amount. Some even allow you to withdraw up to $250,000 from your contract free of charge, depending on the situation.

8 – Convertibility

Many indexed annuity products offer solutions resembling an income rider but allow it to be converted into a lifetime income stream at the choice of the holder. However, note that this convertibility option is usually provided at a certain year. For example, some products allow you to convert your indexed plan into a steady income stream after 5 years while others may do so at 7 years.

9 – Surrender Options

In case you need to surrender your product, there are generally multiple surrender fees that accompany the decision. For example, many may deduct a percentage from the principal amount before returning your money. Fortunately, some products offer varying surrender options, even adding guarantees that ensure that your surrender fees are deducted from your accumulated interest rather than your principal amount.

10 – Death Benefits

In most cases, many choose indexed annuity products that offer lifetime income streams. However, what happens when the holder dies? What happens to the money? Well, that depends on the indexed annuity product. While some products provide lump sum amounts to the beneficiary when the holder dies, others provide a slew of payment options and some don’t simply cease when the holder dies.

Always view your options upon your death. Some products offer improved benefits that guarantee your beneficiary receives a high minimum payout or ensures the value does not decline while still providing a high income stream.

If you plan to acquire an indexed annuity product, ensure that you have the 10 factors above in mind. More often than not, they can mean the difference between the right and the wrong indexed annuity product. It is highly advisable to seek the advice of a professional before acquiring an indexed annuity product. They will ensure that you really are getting the best bang for your buck.

To learn more from this educator, click here (Keith Collins).

About the Author:

Keith Collins is the President and founder of Keith Collins, Inc., which is an independent firm specializing in retirement income planning and Estate planning. For over 20 years, Keith Collins, Inc. helped clients protect their assets and maximize their retirement income in the Central Massachusetts area.

For more information, visit the website at www.keithcollinsinc.com or contact Keith toll free at 888-508-3736.

 

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Friday January 24, 2014

Can I Really Avoid Income Tax On Social Security ?

Written by: Keith L. Collins in Holden, MA

Can I really avoid income tax on Social Security?

For most retirees living on a fixed income, every penny counts. Unfortunately for them, every penny counts to the Internal Revenue Service too.

There’s no arguing that income taxes on social security are incredibly high. As a matter of fact, according to current tax law, up to 85 percent of a person’s Social Security income is taxable when their total ‘threshold income’ exceeds a set limit. What is threshold income?

Threshold income is the government’s formula for determining how much of a person’s Social Security is taxable. It is calculated by adding half of a person’s Social Security income with any other income they may have. The following threshold limits determine how much of a person’s Social Security is taxable:

  • A single person with $25,000 to $34,000 in threshold income: 50% of Social Security is taxable.
  • A single person with more than $34,000 in threshold income: 85% of Social Security is taxable.
  • A married couple with $32,000 to $44,000 in threshold income: 50% of Social Security is taxable.
  • A married couple with more than $44,000 in threshold income: 85% of Social Security is taxable.

Although it may seem inevitable that you’ll be forced to pay these steep taxes, there are ways to reduce or even avoid them altogether.

A viable tax reduction solution: Fixed annuities. Why? First of all, fixed annuities offer tax-deferred interest. Additionally, fixed annuities are the only interest-producing assets that the government does not include in their threshold income calculations – which means investing your money in a fixed annuity actually helps to lower your threshold income. As a result, you’ll be able to avoid income tax on  Social Security income. Income from annuities can be spread out over time, which can help smooth out income over a longer period of time. Spreading out income over a longer period of time can help keep adjusted gross income under the threshold, or can help to avoid big spikes in income (and thus big spikes in tax).

Often, retirees have money in certificates of deposit earning interest. They don’t immediately need the income, and they just roll over the CDs when they mature. To reduce income, and the accompanying taxes, retirees can take the money out of CDs and put it into an annuity. Putting the money in a single-premium guaranteed and insured annuity allows you to defer the income until you need it.

Based on current tax law, the IRS includes the following sources of income when calculating your threshold income:

• Pension • Mortgage income • US Treasuries • CDs • Money Market Accounts • Passbook savings • Credit Union savings • Dividends from stocks • Dividends from mutual funds • Capital gains • Municipal bonds • Annuity withdrawals

As you can see, fixed annuities are not included in this list of assets, which is an advantage over these other investment vehicles. Remember that it may not be necessary to sell or re-position all of your taxable investments, just enough to lower your income to where your Social Security benefits will not be taxed. The real factor in this equation often comes from taxable interest that is simply reinvested and is not paid out as income. This “unused” interest will not be counted as income if it grows inside an annuity or IRA. For investors that have several hundred thousand dollars in bonds or CDs, a fixed annuity can offer higher rates, tax relief and other benefits.

Whether you want to ensure you’ll have enough income to last you through the years or you’re looking for a way to reduce taxes on your Social Security income, a fixed annuity may be an investment solution for you.