How Annuity Fees Work

Annuity fees pay for the cost of administering and maintaining the plan. They are also how the insurance company makes money off of annuities. Unfortunately, such fees can greatly add to the cost of investing so you should be aware of them.

Most of the fees will be charged as a percentage of the annuity. These include operating fees which are charged as a percentage of the income in the plan. There are also fees charged for taking money out early or closing the plan out.

Avoiding Excessive Annuity Fees

A major complaint about annuities is that the fees are excessive. Most of those complaining about high fees could have avoided them if they had done two things. First they should have read the prospectus the document that describes the contract and outlines everything about it including the fees. Second they should have shopped around and found the plan with the lowest fees.

Something to remember is that people that sale annuities for a living will try to sell you the best plan for them not the best plan for you. They will try to steer you to the product that pays them the highest commission. You need to take charge of the process and find the annuities with the lowest fees.

The salesperson is required to give you the annuity prospectus by law. Ask for it and read it. If the salesperson will not provide it you should be able to locate prospectuses for most plans by going to the issuer’s website. When you read the prospectus here are some fees to look out for.

Surrender Fees

This is the biggest cost associated with an annuity it is a charge for taking money of the plan outside the scheduled payments. This can take the form of a flat rate or vesting charges. Vesting charges are percentage based fees that increase in size over time. For example they might start at 7% and fall to 0 over seven years. The idea is to force you to keep your money in the plan.

You can avoid surrender fees but not putting money you might need right away in an annuity. Persons that may need the funds in the near future should keep them out of annuities.

Mortality and Expense Charges

These are the charges the insurer adds to the annuity to pay for the life insurance benefit. Many people end up paying for life insurance coverage they may not need because they already have it in their annuity.

Check the amount of life insurance coverage in the plan and compare to what you already have. You might be able to save money by relying on the annuity death benefit. It is also possible to get annuities with no life insurance coverage or less life insurance coverage. There is no reason to pay for extra coverage if you already have enough life insurance.

Management Fees

The management fee cannot usually be avoided because it pays for administering the plan. You can find plans with lower management fees by comparing prospectuses. A good rule of thumb is that this fee should be under 2%.

One reason why management fees can be high is that a percentage of them maybe paid back to the salesperson in the form of a commission. You can avoid commissions on some products by purchasing directly from the insurer.

There are some no-load annuities that pay no commission. You may have to ask a financial professional or seek out an insurance broker to find these. There are a few websites that list no-load annuities as well.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuities Explained, Fixed Income Annuity, and Annuity Leads.

How Income Tax Works

An income tax is a levy that takes a percentage of the earnings of an individual or corporation to pay for government activities. The difference between an income tax and a sales tax is that a sales tax is collected at the point of sell usually by the seller. An income tax is collected directly from the individual that earns the income.

There are actually several different types of income tax used in the United States. The federal government and 41 of the 50 states collect income taxes. Some county and city governments and in some states school districts also collect in come taxes. The federal income tax is a mix of a progressive income tax and payroll or withholding taxes.

Progressive Income Tax

The philosophy behind a progressive income tax is that large accumulations of wealth are bad for democracy. This tax seeks to prevent individuals from accumulating too much money by raising the percentage of taxation as income increases. The levels of taxation are reflected by the tax brackets.

The income tax was originally held to be unconstitutional in the United States. It took the passage of the 16th Amendment to the Constitution to legalize the income tax in the USA. The original tax was levied directly on individuals it relied upon individuals to report their incomes enforcement by federal authorities. Not surprisingly it was not very effective.

Payroll or Withholding Tax

A payroll or withholding tax is a percentage of a person’s wage or salary that is withheld for tax purposes. Specific federal payroll taxes are designed to pay for Social Security and Medicare.

The way the present tax system works is that everybody who works pays payroll tax. Then the Internal Revenue Service refunds a portion of the tax collected to those in lower tax brackets. The size of the tax refund is based on number of factors including family size, income and marital status.

Each person is given a deduction that entitles him or her to a specific amount of exemption. Most US residents are entitled to some sort of federal tax deduction because of their income level. Additional deductions or exemptions are allowed for activities the government believes to be beneficial such as charitable contributions and home ownership.

Some city governments levy a payroll tax on everybody that works within the city. Some state governments also collect payroll taxes to pay for unemployment insurance, disability insurance and other benefits. Many states such as Colorado also pay tax refunds to residents.

Flat Tax

Under a flat tax everybody pays the same rate say 10%. The idea behind this is that the government would collect more money because there would be fewer deductions. Taxation would be simpler and it would be harder for individuals to avoid taxation by cheating or manipulating the tax codes. Some of the states and many local governments levy a flat tax.

The criticism of a flat tax is that it would be harder on the poor. The wealthy would pay less while the poor would pay more. Many flat tax systems offer some sort of rebate for lower income individuals.

Future of the Income Tax

Even though the income tax is very unpopular in the United States it is probably here to stay. It is quite possible that major reforms could be made to the income tax system in the future. The Canadian province of Ontario has effectively eliminated income taxation for most of its citizens by switching to a sales tax system. It is likely that American states will follow Ontario’s lead.

Since income tax law is constantly changing it is always a good idea to check the Internal Revenue Code (the law that authorizes the IRS and the income tax) before filing your tax return. Something to keep in mind is that Congress can change the Internal Revenue Code every time it wants to.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Ordinary Annuity, Retirement Annuity, and Income Annuity.

How Investment Scams Work

Investment scams take many forms but they share a few characteristics that most people can spot fairly easily. Unfortunately most people ignore the warning signs of investment fraud because fraudsters know how to manipulate human nature to trick you into forking over your money. Learning the signs of investment fraud can help you avoid it.

Basic Characteristics of Investment Scams

All investment fraudsters make two basic promises that you should always avoid. The first promise is that you can large amounts of money fast. The second is that there is little or no risk involved in the investment.

No legitimate investment will instantly make you a large amount of money fast. Investment is about preserving your funds and slowly increasing them over time. Anything that promises a fast return is not an investment it is speculation. Yes there are some real ways you can make a lot of money fast but most of them are very risky.

There is no such thing as a risk-free investment. Anybody that promises you one is lying to you. Generally, high return investments will involve a lot of risk. Low risk investments usually offer very low returns.

Quick Decision

Another sure sign of an investment scam is that the promoter wants the money right away. He or she often claims to be offering a one time opportunity that will go away fast. The con artist rushes you to keep you from researching the scam or thinking about it. Here are some ways con artists trick into this situation:

Investment Seminar Scam

People often older persons with large savings are invited to an investment seminar at a hotel. They are often offered a free meal to and sometimes free liquor to lure them there. Once at the seminar investment experts explain a terrific opportunity to them.

The seminar is often set up in such a way to encourage people to buy. The expert states the opportunity is one time only. Sometimes other con artists called shills attend the seminar and “explain” how much money they have made in an effort to promote the product. Shills may work the community and try to talk people into attending the seminar.

Affinity Scam

In an affinity scam, a con artist pretends to a good member of a group or community. He or she will become active in religious worship, clubs, politics and community activities and befriend people. Then the con artist will reveal a terrific “opportunity” and ask people to invest in it.
Affinity fraudsters often go out of their way to perform good works and demonstrate faith or community spirit. Bernie Maddoff was a classic affinity con artist he pretended to be a good member of a synagogue in order to talk to his fellow worshippers into investing money.

Ponzi or Pyramid Scheme

In the Ponzi or pyramid scheme the fraudster pays the earlier victims of the con with funds collected from those who buy in later. The idea behind this is to convince people that the scam is working. That turns the victims into shills who go out and recruit more suckers. Many investment frauds use this old trick to convince victims that the scam is real.

Inside Information

A final fraud tactic is called inside information. In this scam, the con artist claims to have special information about the market. This will enable the investors to make a killing. In many cases this tactic is used to justify the con artist’s selling of investments through unusual channels and demands to investment money quickly.

Broker or Advisor Scam

A final investment scam to watch out for is a broker or advisor scam. In this scam a legitimate broker or financial advisor steers investors to a great opportunity that will make them a lot of money.

Always be leery of any broker or financial advisor that starts promising large returns or tries to steer you into unusual or exotic investments. In the past ten years financial professionals working for large firms including Ameriprise and Raymond James have been convicted of running investment scams out of the brokerage office.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Single Premium Immediate Annuities, What is an Annuity, and Current Annuity Rates.

How Financial Advsiors Work

A financial advisor is a professional that is supposed to analyze financial situations and provide advice about them. To the average person this means somebody to help with such chores as retirement planning, estate planning or picking investments. It can also mean a person that takes an active role in managing your finances if you cannot take care of them yourself.

The problem is that there is no real definition of a financial advisor. Anybody can be a financial advisor from an experienced professional with an MBA and a securities license to your Uncle Joe. The kind of advisor you chose usually depends upon the type of advice that you need.

Paid and Commissioned Financial Advisors

Broadly speaking there are two kinds of financial advisors out there. A paid or fee advisor charges a fee for his or her services. He or she is usually a certified and licensed professional that provides the services you want. The advantage to a fee advisor is that he or she has no financial incentive in recommending or not recommending certain investments.

A commissioned financial advisor offers “free advice” and instead makes her money from commissions on insurance policies or investments. The drawback to this arrangement is obvious. It is in the advisor’s interest to recommend products that pay her a commission.

The type of advice you seek should depend upon the advice you need. If you need advice on insurance a commissioned insurance agent can provide excellent advice. If you need something more complex like retirement planning or tax advice it is a good idea to spend a little money. The fees you pay will usually be cheaper than poor investments.

Certification of Financial Advisors

The best way to find a competent advisor or planner is to seek out a certified professional. These people have specific titles but other professionals can provide financial advice. In some cases a good accountant or tax lawyer may provide better advice for you than a certified advisor.

Certification means that a person has taken specific courses and tests to prove he or she has specific knowledge. Certification is not a legal status and is not a license. Licensing such as a state insurance license or SEC investment brokers licensing is not an indication of expertise. Some official certifications are:

A Certified Trust and Financial Advisor is an expert in trusts who has three years of experience. He or she has also completed a special training program in trusts and received a CFTA certification from the American Bankers’ Association. This professional would help you set up trusts and with estate planning.

A Certified Financial Planner provides investment and other financial advice. He or she is certified by the Certified Financial Planner Board of Standards. This organization’s purpose is to enhance ethical standards in the industry.

A Certified Retirement Planner is a financial advisor who has completed special courses and tests related to retirement planning. Her purpose is to help you set up a retirement plan.

A Certified Financial Analyst or Chartered Financial Analyst (CFA) is an expert in the analysis of financial instruments including investments. Such experts usually work in the securities business but some of them will provide consultation to individuals. A CFA is certified by the CFA Institute.

Finding a Financial Advisor

You should spend some and effort searching for a financial advisor. You should not just rely on word of mouth or advice from family and friends, many “financial experts” that solicit clients this way are actually con artists trolling for victims. Instead you should seek one yourself and rely on your judgment.

A good place to begin is at the websites of organizations like the Certified Financial Planner Board of Standards. These can help you locate a chartered professional in your area.

Another good suggestion is to run an internet search on the individual before getting involved with him. If there are bad things in his or her history such as lawsuits, complaints or criminal charges the search should turn them up.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Definition, Annuity Rate, and Best Annuity Rates.

How Death Benefits Work

Death benefits are the basis of life insurance but they are also attached to some other vehicles including annuities. In its most basic form, a death benefit or survivor benefit is an amount of money paid to survivors or a person’s estate when he or she dies. There are many variations on these benefits that you should be aware of.

You should always read any life insurance policy you purchase carefully to see what kind of benefit it offers. If you don’t understand what the policy says you should seriously consider having somebody that is knowledgeable about insurance take a look at it.

There are a wide variety of benefits out there. Some of these can be a good deal but others cannot. Always be careful because different death benefits are offered with all sorts of life insurance policies.

Decreasing Benefit

Many term life insurance policies feature what is called a decreasing benefit. The amount of this benefit falls over time. The idea is that people may need less insurance as they get older. They pay off debts and children leave home so the family needs less insurance.

Decreasing benefits can be a good deal for a couple that needs basic life insurance. They can have lower premiums and can be more affordable especially to older persons with diminished incomes.

Accelerated or Advance Payment Benefits

Accelerated or advance payment benefits also called terminal illness benefits allow the insured to receive benefits before he or she dies. If George had such a policy and he got cancer he could receive the benefits early. This kind of benefit can also be called living benefits.

Increasing Death Benefit

An accumulative or increasing death benefit is usually found on permanent, indexed, universal and whole life insurance policies. This benefit increases in value over time through a number of different mechanisms. In most cases it is designed to offset the costs of inflation.

Such a policy usually consists of a principal the initial amount paid for the policy and a cash account that adds value to the death benefit. Some policies have an account that earns interest much like a bank. The cash portion of an indexed life policy is partially invested in a stock market index to increase value.

Increasing death benefits are very popular because funds in such a policy are tax-deferred. No income tax has to be paid until funds are taken out. Some policies also allow policyholders to borrow against the cash value.

Variable Death Benefit

This is another kind of increasing death benefit. The major difference is that this benefit consists of two parts. There is a principal benefit that remains the same and a variable benefit the value of which is linked to an investment vehicle. The value of the additional amount is based on the value of the investment.

Annuity Death Benefits

Annuity death benefits are actually life insurance policies purchased with the annuity. Many annuity providers throw these in as an added bonus when you purchase an annuity.

The amount of the death benefit and the terms affecting it are determined to a provision to the annuity contract called a rider. If George had an annuity with a rider stipulating a $100,000 death benefit his beneficiary would receive $100,000 no matter how much was left in the annuity.

If an annuity had an enhanced death-benefit rider the amount of the survivor benefit would grow if the amount of the annuity grew. If the annuity doubled in size the death benefit would double in size.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Calculator, Annuity Interest Rates, and Annuities Good or Bad.