Annuity Products Reviewed

Annuity products are offered by several of the largest and most trusted life insurance companies in the United States. But understanding the differences among the many companies and the annuity products they offer can be a challenge. For an investor looking to purchase an annuity, the first step is to choose the right company. Because annuities are not FDIC (Federal Deposit Insurance Corporation) insured, it is imperative that an investor consider three criteria before purchasing an annuity contract: The financial strength and security of the company, the number of years it has been in business and whether or not it is publicly traded.

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Well Known Insurance Companies

Three well-known insurance companies, New York Life Insurance and Annuity Corp. (New York Life), TIAA-CREF and USAA Life Insurance Company (USAA) all have the highest ratings for financial strength and stability as awarded by the top three ratings agencies. AM Best has awarded each a rating of A++ Superior, Moody’s Investors Services has awarded each the rating of Aaa Exceptional and Standard and Poor’s has rated each as AAA Extremely Strong. These ratings are extremely important when considering that the issuer of an annuity is effectively accepting a financial obligation to the annuitant that can stretch out over 20 years or more.

While New York Life has been in business the longest, TIAA-CREF and USAA have been issuing policies for over 85 years. All three companies are mutual companies, which mean they are owned by policyholders and not publicly traded. This eliminates the need to focus on short-term profits over long-term strength and stability.

A Deferred Variable Annuity

New York Life, TIAA-CREF and USAA offer deferred variable annuities for an investor looking to maximize retirement savings. A deferred variable annuity is attractive to a long-term investor because of the potential for appreciation over time. The issuer of the annuity invests the premium in stock, bond or money market funds as directed by the investor. The amount of interest credited to the account is based on the performance of the investments. Once the investor reaches age 59 ½ he or she is able to begin taking distribution payments. Distributions are taxed at ordinary income rates.

While the specifics of interest credited, surrender schedules and management fees differ among the three companies, the basic structure of a deferred variable annuity remains the same, regardless of where it is purchased. However, annuities are life insurance products and are therefore regulated by state insurance boards. Products vary by state and may not be available in some states.

USAA Life Insurance Deferred Savings Annuity

USAA offers a non-qualified deferred annuity product called the Deferred Savings Annuity. It pays an interest rate that is reset each year. A higher interest rate is paid on a larger premium. The interest rate is set on a scale that begins on annuities up to $49,999, those between $50,000 and $99,999 and those for which the premium is $100,000 and above. The guaranteed minimum interest rate paid is between 1% and 3%.

In addition to offering competitive interest rates, a 1% premium bonus is added to the account when the contract is finalized. The annuity offers guaranteed growth as the value is guaranteed to increase each day. Tax-deferred growth grows quickly because the interest credited to the account won’t be taxed until distribution begins. Investors up to the age of 94 can purchase a USAA Deferred Savings Annuity. Annuitants can withdraw up to 10% of the value of the annuity once per year after the first year. Withdraws can also be made each year. Partial surrender charges start at 9% in year one and scale down to 0% after year 10. Investors who withdraw money before age 59 ½ may be subject to a 10% penalty.

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IAA-CREF Intelligent Variable Annuity®

The deferred variable annuity product offered by TIAA-CREF is called an Intelligent Variable Annuity. Because it’s a variable annuity funded with after tax dollars, it also offers tax-deferred growth. With the TIAA-CREF annuity, an investor has the choice of selecting between a guaranteed minimum death benefit and no guaranteed minimum death benefit.

For an annuity with a guaranteed minimum death benefit between $0-$99,999 between years one and 10 is 0.60%. After year 10, the fee drops to 0.20%. The larger the annuity, the lower the percentage of the fee. For an annuity with no guaranteed minimum death benefit, the fee on an annuity $99,999 and below is 0.50% in years one through 10 and drops to 0.10% after year 11.

Fees are based on the size of the annuity. A number fund options are available for an investor to choose from. Unlike an IRA from which mandatory withdraws must start by age 70 1/2, mandatory withdrawals from this annuity don’t have to begin until age 90. A significant feature of the TIAA-CREF Intelligent Variable Annuity is that there are no surrender charges.

New York Life Premier Variable Annuity

New York Life offers the largest selection of variable annuities. The Premier Variable Annuity is available for an investor ages 0-80. Because non-qualified deferred annuities can be funded with money that is not earned income, this type of annuity may be considered by a parent or grandparent looking to start an education fund. The initial premium size for a non-tax-qualified account is $5000. Unlike the annuity products offered by the other companies, subsequent premiums of $5000 can be added.

New York Life also has a number of different investment options in several different asset classes are available for investing the premiums. Investors should find this an easy way to diversify a portfolio. Expenses are a percentage of both the premium and of the account value. The annual policy service charge of $30 that is waved once the value of the account reaches $100,000. Annuitants ages 75 and under have withdrawal options ranging from 10% of the value to 10% of current accumulation value to 100% of the gain. Annuitants between the ages of 76-80 can withdraw the up to 50% of accumulation as of the most recent policy anniversary, or 50% of the accumulation amount or 100% of the gain. Withdrawals in excess of these amounts result in surrender charges ranging from 8% in year one to 2% in year 7.

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