West Palm Beach, Florida Insurance Fraud Attorney Russell L. Forkey, Esq.
While a fixed deferred annuity is a form of “investment”, it is, in reality, an insurance product. What this means for an investor is that the person that sells the product to you does not necessarily need to be licensed with the Financial Industry Regulatory Authority, Inc. (FINRA). However, the agent does need to be licensed in your state to sell insurance products. Consequently, you may not have the protections afforded by the FINRA rules and regulations. Regardless, there are still standards which agents must comply with in selling theses products. Therefore, if you feel that you have an issue relative to the insurance product that has been sold to you, you should consult with experienced counsel.
Please keep in mind that the information being provided herein is designed to be generic in nature. Consequently, it is being provided for educational purposes only and should not be relied upon as legal or investment advice.
A fixed deferred annuity is the insurance industry’s version of a savings account. The investor earns a modest rate of interest safely, and allows the investor to postpone the payment of income taxes on earnings for as long as the accumulation phase of the policy is in effect. Please don’t confuse a fixed deferred annuity with an immediate fixed annuity, where you pay a lump sum for the immediate commencement of the payment options referenced below.
Some of the characteristics of fixed deferred annuities include:
- Guaranteed principal: The only way that you can lose your money is if the insurance company fails. It is for this reason that you should only deal with insurance companies that have a strong financial rating.
- Guaranteed minimum: Your money never earns less than this rate, even if your insurance company reserves the right to reduce the rate it gave you in the first year.
- Premium requirements: Usually, the minimum initial investment for a fixed annuity ranges from $2,000 to $100,000. You can purchase a single premium contract with one premium payment or a flexible premium contract with ongoing payments.
- Death benefits: If you die while you own the annuity, your premium payments, plus the money that you earned up to your date of death, goes to your beneficiaries.
- Surrender charges: The surrender charge (contingent deferred sales charge) is part of the financial penalty that you have to pay if you cancel the annuity contract during the surrender period. The percentage charge is the greatest the first year and then usually declines one percent per 365 days until it disappears at the end of the surrender period.
- Surrender period: The surrender period is the period of time (usually one to 10 years) during which you cannot withdraw more than 10 percent per year without a penalty.
- Annual withdrawals: Most contracts let you withdraw up to 10 percent of the value of your annuity (your original investment plus interest) every year with no penalty. If you are younger than age 59 1/2, however, you may own a penalty to the IRS.
- Income option: You can convert the value of the fixed annuity to a guaranteed income stream for a specific number of years or for as long as you (or you and your spouse) are living.
Notwithstanding the foregoing, fixed deferred annuities do have some pitfalls. For example, you may find yourself trapped for years in an investment that pays you less and less interest every year if you failed to read the fine print of the contract, are lured into a bad contract, by the offer of a substantial, upfront bonus, get bad advice or are the subject of fraud, misrepresentation or some type of other broker misconduct.
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