Annuities and Retirement Products
Two phases
An annuity is a contract that liquidates a sum of money over time. During the accumulation phase, premiums earn interest or investment return; during the annuitization (payout) phase, the insurer makes payments - for life, for a period certain, or both. Ownership, annuitant, and beneficiary are distinct roles; the owner controls the contract and names the annuitant.
Types
Immediate (payout begins within about a year) vs deferred. Fixed (guaranteed interest rate, insurer bears investment risk) vs variable (separate account, owner bears risk, securities license and prospectus required) vs indexed (credited by index performance subject to floor and cap). Single premium vs flexible premium. Payout options: life only, life with period certain, joint and survivor, fixed period, fixed amount, and refund/lump-sum.
Taxes
Nonqualified annuities grow tax-deferred; each payout contains a return of basis, calculated using the exclusion ratio - only available for nonqualified money. Withdrawals before age 59½ generally face a 10% federal penalty in addition to ordinary income tax; gains come out first (LIFO) on withdrawal. Qualified annuities (IRA-funded) are fully taxable because there is no basis. Section 1035 exchanges move annuity or life values tax-free into a like contract.
Traps
Surrender charges and market value adjustments apply early; annuity suitability and best-interest standards apply to sales to seniors; bonuses are rarely free. Variable annuity guarantees cost extra and are backed by the insurer's claims-paying ability.
Rule of thumb
Ask "who bears investment risk?" Fixed = insurer; variable = owner; indexed = shared with limits. Then ask "qualified or nonqualified?" - that determines whether the exclusion ratio exists.