What would happen if you outlived your retirement savings? This may not be an unreasonable supposition as life expectancies continue to increase. To avoid this unfortunate situation and prevent you from outliving your savings, your estate planning team may recommend an annuity.

1. Question: What is a tax deferred annuity?

An annuity is a tax deferred saving vehicle. It can provide you with a series of income payments at regular intervals to avoid the unfortunate situation described above.

An annuity can be either immediate or deferred. An immediate annuity begins to make income payments soon after you pay the premium. The income payments from a deferred annuity start later and contain an "accumulation" period. The time after income payments start is called the "payout" period.

The principle of a tax deferred annuity is this:

2. Question: How exactly do tax deferred annuities work?

A tax deferred annuity is a contract between you and the insurance company that guarantees either a fixed rated of return (fixed annuity) or a variable rate (variable) of return for a specific period of time.

Basically a tax deferred annuity has two phases. You might call one phase the accumulation phase and one phase the annuitization or withdrawal phase - when you begin receiving payments.

Once you start withdrawing money from the deferred annuity either randomly or in a regular fashion you will begin paying taxes on the interest earned.

Your estate planning team can help you select a company that offers financial strength (safety for your money), competitive costs, and a good rate of return for the fixed annuity and wide investments opportunities for the variable annuity.

3. Question: Describe the basic types of tax deferred annuities.

As mentioned above there are two basic types of annuities. They are:

• fixed
• variable

Fixed Annuity

A fixed annuity provides a guaranteed, fixed dollar benefit amount for a given period. So for example, during the accumulation period of a fixed deferred annuity, premiums earn interest at a rate indicated in your annuity contract and will be paid out at no less that the minimum rate. This product is more conservative than the variable annuity.

Variable Annuity

During the accumulation period of a variable annuity your premium dollars (less any fees) are put into a separate account and are invested in potentially higher earning investment instruments that you selects. For instance, mutual funds or guaranteed investment contracts.

So the value of your variable annuity is based on the performance of the investments you choose. There is no guarantee that you will receive all of our premium back or that your that you will earn a return.

A simple way to look at a variable annuity is this:

• Step I: you invest money either in a lump sum or over a period of time into accounts that meet your overall financial plan (risk tolerance, time frame, etc.).
• Step II: the earning from your investment choices grow tax deferred. This mean that taxes are paid upon withdrawal.
• Step III: Either through random withdrawals or a systematic withdrawal your money is taken out. (It is very important to note that you can be subject to IRS penalties if you withdraw the money prior to 59 1/2).

A variable annuity offers a choice of investment vehicles - mainly groups of stocks or mutual funds. This means that the principle balance fluctuates and the return is variable. This product can offer the possibility of a higher rate of return in comparison to the fixed annuity.

Once you retire, the annuity pays out an income payment (based upon the performance of the underlying investment) either a fixed amount or a variable amount that changes with the value of the investment held

An equity index annuity is an annuity that enables you to earn the rewards of a risk-taker without the risk. These annuities are linked to an equity index while still gaining the traditional benefits of a more conservative fixed annuity.

The equity index annuity (EIA) utilizes the S&P 500 index which has historically out-performed fixed-interest products like CDs and bonds. An EIA offers you a portion of this growth with a guarantee and a hedge against inflation that can erode your retirement dollars.

When the S&P 500 goes up, your EIA will be credited with a portion or percentage of the growth. This percentage is called the participation rate.

Some equity index annuities have guaranteed participation rates, while others change at specific times. But your risk is only as great as the policy's guaranteed minimum. In otherwords, with an EIA your policy value is protected against market down times. You enjoy the ups without the worry of the declines.

In a nutshell, the benefits of the EIA include

• the opportunity for tax-deferral
• the opportunity to realize the benefits of an upswing in the market place without the risk of the downside
• guaranteed minimums

Other benefits of the EIA include the opportunity to:

• renew the EIA at the end of the annuity's term
• exercise a tax-free exchange for another type of annuity
• surrender the annuity for its cash value
• convert the EIA to a stream of income payments

The above is only a highlight of the equity index annuity. Your agent and policy will outline surrender charges, penalties for individuals who surrender before 59 1/2 years old, and the types of equity index annuities and the methods for measuring increases.

5. Question: How does a tax deferred annuity compare to other investment vehicles?