This information is designed to answer some of the general questions you may have. If you currently have an annuity contract, we hope you will review this information. Please note, however, this is not part of your annuity contract. For questions or changes to your policy, contact your Illinois Mutual agent or our Policy Service Department at 1-800-380-6688 ext. 755 or e-mail us.
What is an annuity?
An annuity is an investment contract or policy between you and a life insurance company.
Annuities can be a useful tool for retirement planning. Annuities enable you to save money on a tax-deferred basis. You will not pay taxes until you begin to withdraw your money. Unlike a 401(k) or IRA, there are no limits on the amount you can put into an annuity. You can purchase a contract that provides lifelong income or one that pays you for a specific time. Payments can be monthly, quarterly, semiannually or annually at a designated time. Annuities also offer a guaranteed competitive interest rate. If you don’t want to deal with the ups and downs of the stock market, you can invest your money in a fixed annuity, which would offer you a specific rate of return.
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Why should I purchase an annuity?
You may need to protect yourself against outliving your assets, even if you have diligently saved for your retirement.
Consider the following:
- Retirement plans limit contributions
Employer-sponsored plans such as a 401(k), 403(b) or Keogh are an important part of planning for retirement. However, contributions to these plans are limited.
- Social security and pensions may not be enough
Your social security and pension may provide less than you need to retire. In 2002, the average Social Security check was $876 per month, according to the Social Security Administration and the value of fixed pensions is eroded by inflation.
- Inflation and taxes can eat away at savings
Over time, inflation will make everything you purchase more expensive, so your investment earnings need to keep pace to maintain your current standard of living. Many sources of income may also be taxable such as Social Security, IRA payments, interest earned on CDs and savings accounts. You may end up with a lot less after-tax income than you had been expecting.
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What are the different types of annuities?
There are many types of annuities for a variety of different needs and budgets. Your age and risk tolerance should weigh heavily in your decision regarding the type of annuity in which to invest. When considering an annuity, you will have to decide when you want to receive the money. If you invest in an immediate annuity, you would receive the income now, while a deferred annuity would be a savings vehicle for the future.
- Immediate annuity: You pay the insurer a lump sum of money in exchange for receiving income for a set period of time or for as long as you live. You usually start receiving payments immediately after transferring funds into an annuity.
- Deferred annuity: This is a long-term retirement savings vehicle, which builds savings on a tax-deferred basis.
You will also need to select how your money will be invested. You can invest your money so that you get a stable rate of return or you can pick an annuity where your money is invested in the stock market. You can pick one or a combination of the following:
- Fixed annuity: This provides a stable, guaranteed rate of return.
- Variable annuity: The annuity is invested in the stock or bond market. As a result, you assume some financial risk in return for a potentially higher economic reward.
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How will I receive my annuity payments?
An important decision in purchasing an annuity is deciding how you want to be paid. You can select annuity payouts for a set period of time or continue for your lifetime. With some options, a beneficiary can be designated to receive payments upon your death. You have several choices. The annuity value is applied toward a settlement option to provide payments to be received by you for life or for a fixed period.
- Fixed payments – paid in periodic installments of an agreed amount until such proceeds plus interest have been paid in full.
- Fixed period – paid in periodic installments for a period of no less than five years.
- Life income – paid in installments while the payee lives. Each installment amount is fixed based on the sex and age of the payee when the first installment is paid.
- Life income with a guaranteed period – paid in installments for a guaranteed period and thereafter while the payee lives. The guaranteed period may be selected by the owner. Each installment amount is fixed based on the sex and age of the payee when the first installment is paid.
- Joint and Survivor Option – paid in joint installments to two payees during their joint lifetime. At the death of the first payee, the payments to the remaining payee will continue at a level initially determined by the owner.
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Will I pay tax on the payments from the settlement option?
You will pay income tax on the payments as ordinary income. If the premiums you paid were not tax-deductible, a portion of each payment will be excluded from tax as a return of premium. If taken before age 59.5, you may be subject to a penalty tax from the IRS.
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How will I be notified of my contract values?
You can access a summary of your account online through our website (My Policy) at any time. We will also send you an Annual Statement each year in the month following the anniversary of the contract effective date or in January as a year-end statement. Your contract type will determine when the statement is produced.
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How I can withdraw funds from my contract?
Illinois Mutual's Policy Service Department or your agent will provide you with the form necessary to make a withdrawal. If your contract has a cash value greater than $25,000 we will provide you with the forms to make systematic withdrawals by Electronic Funds Transfer.
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Will a surrender charge apply to my withdrawal?
A surrender charge may be applied. You should refer to your contract and the schedule of surrender charges. During any contract year, you may withdraw up to 10 percent of the accumulated value without incurring a surrender charge. However, during the first year, if you withdraw more than the interest earned, we will apply a surrender charge to the excess amount.
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If I am required to make a minimum distribution this year from my IRA and will be rolling or transferring the funds to another contract, do I need to make my distribution from the existing contract?
The required minimum distribution is not eligible for rollover. It should be paid to you before the transfer is made. However, you may satisfy the minimum distribution requirement by making a distribution from another IRA that you own.
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What payment options are available to my beneficiary on my annuity contract?
Your beneficiary may choose the proceeds from the policy to be left with Illinois Mutual to accrue interest, paid in installments, taken in cash, or annuitized and paid out over the beneficiary's lifetime. If your beneficiary is your spouse, he or she can elect to continue the contract in his or her name. Your beneficiary can also elect to defer the payment of the death benefit up to five years from the date of death of the owner.
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