How to Measure the Value of a Fixed Annuity

How Qualified and non-Qualified Annuities Differ

You may have heard that annuities can be used in tax-qualified retirement plans, such as Individual Retirement Accounts (IRAs), 401(k) plans and 403(b) plans, but do you understand how these annuities work?

Annuities used in these tax-qualified retirement plans are often referred to as qualified annuities. Alternatively, annuities that are not used in tax-qualified retirement plans are often referred to as non-qualified annuities.

Qualified vs. non-qualified annuities

A qualified annuity can provide the annuity holder with the same potential benefits offered by non-qualified annuities, including guaranteed income payments for a period of time or for life, as well as guaranteed death benefits.

Qualified annuities, however, do not provide any tax-deferred treatment of earnings above and beyond those provided by non-qualified annuities. In the case of non-qualified annuities, tax deferral is provided by the annuity; for qualified annuities, tax deferral is provided by the qualified plan itself.

The key difference

There is also one important difference between qualified annuities and non-qualified annuities: Like all contributions to tax-qualified retirement plans, qualified annuities are subject to annual contribution limits. However, there are no limits to how much you can invest in a non-qualified annuity.

As a result, many people consider non-qualified annuities valuable personal retirement savings accounts to which they can contribute as much as they need for retirement.

Members of the financial industry debate the purpose of qualified annuities. Since non-qualified annuities provide tax-deferral, why buy them under the umbrella of a tax-qualified retirement plan, which may result in additional fees?

This is certainly something to consider when you evaluate which type of annuity is best for you: qualified or non-qualified.

If you need assistance in selecting the right annuity for you or help in maintaining your current annuity, your advisor can help guide you in the right direction.

How to Measure the Value of a Fixed Annuity

Most people realize that the rate of return on their deferred fixed annuity is determined by their insurance company, but it’s actually a bit more complicated than this.

Fixed annuities

Fixed annuities generally specify a minimum credited interest rate for the lifetime of the contract, but there are several types of deferred fixed annuities, each with its own method of crediting interest.

Book value deferred annuities

Products that are known as “book value deferred” annuities earn a fixed rate for a guaranteed period; the surrender value is based on the annuity’s purchase value plus credited interest, net of any charges.

Market value adjusted annuities

Products known as “market value adjusted” annuities work like book value deferred annuities, but the surrender value is subject to a market-value adjustment based on interest rate changes.

Indexed annuities

An “indexed annuity” guarantees that a certain rate of interest will be credited to premiums paid, and it provides additional credited amounts based on the performance of a market index, such as the S&P 500 Index.

These indexed annuities also have additional interest-crediting variables, including the method used to measure the change in the underlying index, the percentage of the calculated index gain credited to the contract owner as interest, and the maximum index-based interest credited, among others.

Annuities can be complicated. If you need assistance selecting or maintaining a policy, contact your advisor, who can help you cut through the complicated world of annuities.