It is a contract between you (the annuity owner) and a life insurance company. In return for payments, the insurance company agrees to provide either a regular stream of income (the annuity) or a lump-sum distribution at some future time (generally, once you retire or reach age 59 ½). Liquidated earnings are subject to ordinary income tax and may be subject to a contingent deferred sales charge or a surrender charge. If earnings are received prior to age 59 ½, a 10% federal income tax penalty may apply.
Your payments are invested by the insurance company in one or more securities portfolios. The value of the annuity varies with the performance of the underlying portfolio, but gains are generally not taxed until a distribution is made to the annuitant. (Usually, you are the annuitant, though you may designate someone else in many circumstances.)
Variable annuities do not provide any additional tax advantage when used to fund a qualified plan. Investors should consider buying a variable annuity to fund a qualified plan for the annuity?s additional features such as lifetime income payments and death benefit protection.
How does it work?
A variable annuity has two stages: the accumulation period and the payout period. The accumulation period begins as soon as you invest. If you select a single-premium deferred annuity, this is done with one large payment. You may generally make one or more payments of various amounts, whenever you like, to a deferred annuity. Your payment purchases "accumulation units" in the insurance company's separate account(s). In turn, these separate accounts invest in several investment choices representing various investment categories from various asset classes, which are established and administered solely for the benefit of the variable annuity. Later, your principal and gain are paid out to you, either as a regular income for life* or for a designated number of years, as a single lump-sum amount or through systematic distributions.
* Payment of lifetime income is contingent upon the claims-paying ability of the issuing company or companies.
How many accumulation units can I purchase with my payment?
Each accumulation unit represents a proportionate share of the net assets of a portfolio. For example, assume a $10 million portfolio with one million accumulation units; each unit has a current value of $10. If the entire portfolio appreciates to $12 million, the unit value rises accordingly, to $12. Divide your deposit by the accumulation unit value to approximate the number of units you'll purchase.
What happens once I've purchased accumulation units?
The investment choices accumulate tax-deferred earnings, dividends and/or capital gains that are reinvested to earn still more income. This tax-deferred compounding - earning current income on past income without paying taxes until a distribution* is taken ? helps allow the value of the accumulation units to grow considerably faster than in a comparable taxable investment.
* Liquidated earnings are subject to ordinary income tax and may be subject to a contingent deferred sales charge or a surrender charge. If taken prior to age 59 ½, a 10% federal income tax penalty may apply.
Does tax deferral* really make that much difference?
In a tax-deferred investment your money grows faster because you're deferring taxes on your earnings and allowing that tax-deferred money to benefit from investment earnings. With a taxable investment you pay taxes on your earnings each year, leaving you with less money to benefit from nvestment earnings. In an annuity, you will pay taxes when you take a distribution**, but at that point, you may be in a lower tax bracket.
* Variable annuities do not provide any additional tax advantage when used to fund a qualified plan. Investors should consider buying a variable annuity to fund a qualified plan for the annuity?s additional features such as lifetime income payments and death benefit protection.
** Liquidated earnings are subject to ordinary income tax and may be subject to a contingent deferred sales charge or a surrender charge. If taken prior to age 59 ½, a 10% Federal income tax penalty may apply.
What types of securities do the portfolios contain?
Marketable Securities The majority of variable annuities provide a selection of investment choices, which may invest in stocks, bonds (high-or low-quality) and/or money-market instruments. You allocate your money to purchase accumulation units in one or more of these portfolios, depending upon how aggressive or conservative you wish to be. Thus, if you are willing to take the risk in return for greater potential reward, you might choose a growth-oriented stock portfolio. If you are a more conservative investor, who wants less risk of short-term volatility, your choice might be a portfolio of high-quality bonds or a money market.
Why is it called a "variable annuity"?
The word "variable" actually refers to the fact that the market value and/or income generated by the underlying securities is not fixed: it may vary over time due to prevailing market conditions. Thus, while variable annuities can be less predictable than other investments, they also have the potential to take advantage of favorable market conditions. Historically, equities have livered a higher total return than that obtained on guaranteed fixed-income investments such as CDs, savings accounts or fixed-return annuities. (Note, however, that CDs are FDIC insured and offer a fixed rate of return, while the principal value and investment return of a variable annuity will fluctuate with changes in market conditions. The customer's capital is exposed to a risk not present in ownership of a CD.)
Is there any protection against loss of my initial investment, if the value of the underlying securities can vary?
While the value of your investment may fluctuate, every variable annuity has features that work to help reduce risk and increase your return, including:
Professional Management
All portfolios are constructed and managed on a daily basis by investment professionals. Backed by education, experience and research teams, they are better able to select the right investments to achieve the objectives of each portfolio.
Diversification
Because you invest in a portfolio, your risk is spread among many securities, reducing the possibility of losing a substantial amount due to any one security's decline in value.
Transfer Privileges
Most variable annuities permit you to reallocate your investment among the various portfolios, generally without charge, as long as you don't move the money too frequently. It allows you the flexibility to transfer among portfolios when interest rates or market conditions change.
Guaranteed Death Benefit
Variable annuities generally provide that in the event of death during the accumulation period, no less than the entire amount of your purchase payments, adjusted for withdrawals, will be paid out to your beneficiary.*
* The guaranteed death benefit depends on the claims-paying ability of the issuing company.When and how can I access my money?
Like all tax-favored savings plans, variable annuities are intended to provide a retirement income, so the payout phase generally begins at retirement or after you reach age 59 ½. Distributions prior to age 59 ½ are possible but trigger ordinary income tax and may also trigger a 10% federal income tax penalty on earnings withdrawn. You may take your money in a lump sum, make discretionary or systematic distributions, or you can "annuitize".
What does "annuitize" mean?
Choosing to receive payments at regular time intervals is "annuitizing". Most contracts offer five or six ways to annuitize, based primarily on how long you want the income to last. For instance, you may opt for a life annuity entitling you to a monthly payment for as long as you live, even if you deplete the total accumulated value of your annuity investment. Another possibility is a period certain annuity; your principal and interest are distributed over a specified number of years regardless of whether you die during the specified payout period. (Please note that various choices for annuitization depend on the claims-paying ability of the issuing company or companies)
If I annuitize, how is the amount of my monthly payment/distribution determined?
First, the insurance company converts your accumulation units to "annuity units", which entitle you to payouts that are partly a return of principal and partly gain. Meanwhile, the undistributed portion of your principal continues to compound, tax-deferred. The amount of each monthly payment will depend on the payout option selected (i.e., how quickly the fund is to be depleted), your age, the number of annuity units and the current value of the portfolio.
If I elect to receive income payments from my annuity on a variable basis, will my monthly payment vary?
Yes. The amount of income you receive each month will fluctuate with the performance of the underlying investment choices you have selected.
How are variable annuity payouts taxed?
If your annuity is not in a qualified plan, regular distributions (after retirement or reaching age 59 ½) are subject to ordinary income tax on the earnings only; any return of principal is nontaxable. Distributions prior to age 59 ½ are possible, but generally are subject to not only income tax on arnings, but also a 10% federal income tax penalty on earnings distributed. In a qualified plan, pre-tax contributions and earnings are treated as ordinary income. Variable annuities do not provide any additional tax advantage when used to fund a qualified plan. Investors should consider buying a variable nnuity to fund a qualified plan for the annuity?s additional features such as lifetime income payments and death benefit protection.
What happens if the money is paid out to my beneficiary?
As a contract issued by a life insurance company, a variable annuity provides a death benefit that can pass directly to your beneficiary avoiding probate*. The death benefit** generally is either the total amount of your purchase payments, adjusted for any withdrawals, or the current value of your investment, whichever is greater. Thus, during the accumulation period, the beneficiary would typically receive an amount equal to or greater than your invested dollars (less any distributions) without costly delays.
* Although the death benefit can avoid probate, any gain in the death benefit will be taxed as ordinary income.
** The guaranteed death benefit depends on the claims-paying ability of the issuing company or companies.
What criteria should I use in selecting a variable annuity?
The soundness of the issuing insurance company is very important. Examine the issuer?s financial stability and experience. Find out how well the company is rated by independent insurance industry analysts such as A.M. Best & Co.
* Look also at the choice of investment portfolios and the ability to transfer among them to match your investment personality.
Fees, including surrender charges, should be carefully reviewed, since they ultimately affect your total return.
Most variable annuities have replaced front-end sales charges with contingent deferred sales charges or surrender charges - the amount you pay the insurance company if you take out more than a specified percentage of your assets before a predetermined number of years. While some annuities have surrender charges that decline from 7% to 0% over 5-7 years, others maintain surrender charges throughout the accumulation phase of the annuity. For this reason, annuities are generally considered to be long-term investments, and may not be suitable for those who need to take frequent or substantial distributions during the accumulation period.
Be sure to look at annual administration fees and to find out if the issuing company charges for transfers among the annuity portfolios.
* Financial strength ratings do not apply to the variable investment options offered under the contract. Ratings subject to change.
How can I find out whether an annuity is right for me?
Your registered representative can help you review your individual circumstances - income, goals, financial/retirement resources, age and other investments - to determine what type of annuity is best for you.
Consider the annuity's unique advantages - no maximum investment, retirement income you cannot outlive*, guaranteed death benefit*, professional management and diversification. You'll see why variable annuities are so popular in todays economic and tax environment.
For more complete information, contact your registered representative or call 1 (800) 366-8226 for a prospectus on one of MassMutual?s variable annuities. Please read the prospectus carefully before you invest or send money.
* Payment of lifetime income and guaranteed death benefit are contingent upon the claims-paying ability of the issuing company or companies.
The stages of an annuity Accumulation:
In a variable annuity, your purchase payments may be invested in your choice of one or more equity investment choices. Most variable annuities have separately managed portfolios of stocks, bonds (high-or low-quality) and/or money market instruments, as well as "balanced" portfolios that invest in a mixture of these securities. You generally can allocate your investment among the portfolios as you prefer and make periodic changes.
Payout:
When you're ready to withdraw your money, you may select:
An Annuity. - The insurance company provides a number of payout choices from which you can select the one that best fits your income needs. Your payout can be guaranteed for life*. The amount will be based upon your age and life expectancy as well as the value of your accumulated investment. Or you can choose a specific amount to be paid at regular intervals, or a specific number of years for which you would like to receive payments. In any case, while a minimum monthly payment may be guaranteed, your actual payments will vary depending upon the continuing performance of the investment ortfolio(s) you have selected.
Lump-Sum Payment - You can choose to receive your payment in a lump sum at any time prior to commencement of annuity payments as described above.
Discretionary or Systematic Withdrawals** - You may withdraw your funds on a discretionary basis, or you may elect to receive regular payments of a specific dollar amount. Your account remains in the accumulation phase under either of these methods.
* Guarantee of income for life is contingent on the claims-paying ability of the issuing company or companies.
** Liquidated earnings are subject to ordinary income tax and may be subject to a contingent deferred sales charge or a surrender charge. If taken prior to age 59 1/2, a 10% federal income tax penalty may apply.
If you qualify for an IRA deduction, consider the possibilities of an individual retirement account. The purchase of a variable annuity to fund your IRA will give you all the usual benefits of an IRA, plus the guaranteed death benefit and lifetime income of the annuity. The guaranteed death benefit and payment of lifetime income are contingent upon the claims-paying ability of the issuing company or companies.
Variable annuities are sold by prospectus. Before purchasing a variable annuity contract, investors should carefully consider the investment objectives, risks, charges and expenses of the variable annuity contract and its underlying investment choices. For this and other information, obtain the prospectuses for the variable annuity contract and its underlying investment choices from your registered representative. Please read the prospectuses carefully before investing or sending money.
