Annuities may be classified according to when income payments are received. An immediate annuity is funded with a single premium payment. Income payments typically begin after the first contract year. Payments may be received monthly, quarterly, or annually depending on your contract. A deferred annuity may be purchased with a series of payments over a period of time, or with one lump sum. Income payments can begin at a future date selected by you as the policyowner.

Annuities can also be defined according to their investment configuration. An annuity may be classified as fixed, variable, or indexed.

A fixed annuity guarantees the principle investment and also provides for a fixed interest rate guaranteed by the contract. Over the life of the contract, the company may pay a higher interest rate than the initial rate; however, the interest rate will never fall below the guaranteed minimum rate as specified in the contract. Interest accumulates on a tax-deferred basis until income payments begin or the funds are otherwise distributed. Premium payments may be made in a single lump sum, or by a series of payments over time. An NAIC (National Association of Insurance Commissioners) Buyers Guide for Fixed Deferred Annuities along with a policy summary is required to be provided at the time of sale.

A variable annuity provides a choice of investment portfolios similar to mutual funds and some may include a fixed interest account option. Premiums may be allocated to one or more of the investment portfolios, or to the fixed interest  account. Premiums allocated to the investment options are held in the insurer's separate accounts, are not guaranteed by the insurer, and are subject to market losses. Premiums allocated to a fixed account are held in the insurer's general account and are backed by the full faith and credit of the insurer.

Accumulation values of the investment portfolios are expressed in dollars per unit, and the value of each unit goes up or down depending on the performance of the underlying investments. The contract owner has the opportunity to experience market-based gains, but also bears the risks associated with market declines.

Variable annuities are recognized by the Securities and Exchange Commission as a securities product. Agents who sell variable annuities must be licensed by the State of Florida as an insurance agent, appointed by the insurance company they represent, and must also hold a securities license issued by FINRA (Financial Industry Regulatory Authority). At the time of sale, the agent is required to provide you with a prospectus detailing the underlying fund investment objectives, risks, fees, charges, and fund expenses.

An indexed annuity is considered a fixed annuity and often referred to as an equity indexed annuity.  Interest in these annuities is paid according to the gains of an external index, which is selected by the purchaser. An example of such an index is the Standard and Poor’s 500 Composite Stock Price Index. Most indexed annuities offer a variety of stock and bond indexes to choose from as well as a fixed account. Interest is credited to the annuity based on the performance of the chosen index and a percentage of the index gains based on the selected crediting strategy. An indexed annuity pays interest based only on the upward movement of the index, decreases in the index are ignored. This means there is no downside market risk with an indexed annuity; however, gains in any given year may be zero. 

When the owner of the annuity decides to set up a series of guaranteed income payments, this is called annuitization. Depending on the annuity contract, there may be several annuitization options to choose from. These options may include the following: 

Lump Sum - the balance of the annuity account is paid in a lump sum.

Straight Life Income - pays the annuitant a guaranteed income for the annuitant’s lifetime. Upon death of the annuitant no further payments are made.

Life Annuity with Period Certain - guaranteed to pay the annuitant for life, or for a certain period of time, whichever is longer. Period Certain terms are usually 10, 15, or 20 years.

Joint and Full Survivor - provides payment of the annuity to two people. If either of them dies payments continue to the survivor for life. Similar arrangements are Joint and Two Thirds Survivor, and Joint and One-Half Survivor.

Cash Refund - provides for a guaranteed income to the annuitant for life. If the annuitant dies before the principal is depleted, the balance is paid to the beneficiary in a single lump sum.

Installment Refund - the same as a Cash Refund except it provides for the funds remaining at the annuitant’s death to be paid to the beneficiary in the form of continued annuity payments, not as a single lump sum.

Under current federal law, annuities receive special tax treatment. This means that growth in the annuity is income tax deferred. When withdrawals are made or income payments begin, part of the money received will be considered a return of your principle, and part of the money is the income earned on your principle. Amounts withdrawn from an annuity prior to the age of 59 ½ may be subject to a 10% tax penalty.

An annuity can be used to fund an IRA (Individual Retirement Account). If an annuity is established as a Traditional or Roth Individual Retirement Account (IRA), it is considered a 'tax qualified account' and distributions are taxed as the underlying IRA is taxed. For example, if the annuity houses a Traditional IRA, this means the annuity was funded with pre-tax dollars, and any income or growth will be taxed as ordinary income when received. For Roth IRA annuities, the annuity is funded with after tax dollars and any withdrawals or income payments are received income tax free. 

Annuities may also be used to fund employee pension benefit plans. Tax-sheltered annuities are annuities that are purchased by an employee of a public school or tax-exempt organization. You should consult with a tax professional to determine if any of these options are right for you. 

Cash value in a life insurance policy may be transferred into an annuity without incurring income taxes via a 1035 exchange. A 1035 exchange refers to Section 1035 of the Internal Revenue Code which provides that the values of an existing life insurance policy or annuity can be rolled over into an annuity without incurring income tax on the growth.  Your insurance company and agent are familiar with the forms required to complete a 1035 exchange. If an existing annuity is surrendered, and you or your bank receives the distribution check directly, you may be in constructive receipt of the annuity assets and subject to income taxation.

When replacing an existing annuity or other investment, you should consider all of the advantages and disadvantages of the replacement purchase. These include, but are not limited to: surrender charges, interest rates, riders, management fees, administrative costs, and all other fees. Please ask your agent to explain any fees or costs associated with the purchase of your annuity.

If an agent recommends that you purchase, replace, or exchange an annuity, the agent is required to collect certain information regarding suitability. If you do not wish to disclose certain financial information, the agent is required to obtain signed disclosure forms. When a replacement is involved, the agent must provide you with a disclosure and comparison of both the proposed annuity and the current annuity. The agent is also required to provide you with a document that explains how they are compensated for the annuity sale.

Insurance companies selling annuities must allow a “free-look” period during which time you may return the policy for a refund. Fixed annuities must provide an unconditional refund (including any contract fees or charges), for at least 21 days from the date of policy delivery. A 21-day “free look” is also required for variable and indexed annuities. In some cases, with variable or indexed annuities, your refund may be less than your original deposit. Your refund will be equal to your deposit less any adjustments made due to market fluctuations during the free look period. This is called a market value adjustment. Please review your contract again after it is delivered and ask your agent to clarify any provisions or terms you do not understand.

The cover page of your annuity must contain the following disclosures, if applicable, in bold print and at least 12-point type:

1. “Please be aware that the purchase of an annuity contract is a long-term commitment and may restrict access to your money.”
2. “It is important that you understand how the bonus feature of your contract works. Please refer to your contract for further details.”
3. The interest rate applied to your contract may be subject to change periodically and may increase or decrease, subject to certain interest rate guarantees described in your contract.”
4. A Prospectus and Contract Summary (for variable annuities) and a Buyer’s Guide are required to be given to you.”

The cover page must also provide contact information for the issuing company, and the selling agent, and the toll-free help line for the Department of Financial Services.

• Does this annuity meet my financial objectives?
• What is the guaranteed minimum interest rate?
• Does the annuity include any riders? Do I understand how they work? Is there a cost for the riders? What is the annual cost?
• Ask your agent if there are any additional fees associated with your annuity.
• What are the surrender charges or penalties if I want to end my contract early and take out all my money?
• How many years will I be subject to surrender charges?
• Can I make a partial withdrawal without paying charges or penalties or losing earned interest? Can a withdrawal be made at any time during the year? How many withdrawals are allowed? 
• Does my annuity waive withdrawal charges if I am confined to a nursing home or diagnosed with a terminal illness?
• What are my income options when my annuity reaches the end of the surrender period?

Annuitant - the person upon whose life the annuity contract is payable. The annuitant may or may not be the owner of the annuity.

Accumulation Period - the period between the time a premium or premium payments are made, and income payments start.

Accumulation Units - pertains to variable annuity contracts. Premiums paid to the company, less a deduction for any expenses, are converted to accumulation units and credited to the individual’s account. The value of each unit purchased will go up or down with the market.

Annuity Units - before a variable annuity can be paid out the accumulation units are converted to annuity units. Annuity units are the basic measure and method by which a purchaser’s annuity income is determined. Once the annuitization or payout period begins, the number of annuity units does not change. However, the value of the annuity units will go up or down with the market.

Annuitization or Income Date - a date or age named in the annuity at which time the company begins making annuity payments.

Annuitization Period - the period of time periodic income payments are made.

Beneficiary - the person (named by the policy owner) entitled to receive benefits, if any, upon the death of the annuitant.

Bonus Annuity - pays a premium bonus amount when you buy the annuity or pay a premium, or an interest bonus added to the interest your annuity would normally earn. The bonus or increased interest is usually contingent on a policy condition such as remaining in force for a certain number of years, or annuitization (setting up periodic income payments). Please ask your agent to explain any conditions that must be satisfied to receive the bonus.

Buyer’s Guide - a document prepared by the National Association of Insurance Commissioners that provides information about annuities. The agent is required to provide a buyer’s guide to each prospective purchaser for fixed and indexed annuities. For variable annuities, the insurer is required to provide a prospectus containing policy investment and performance details.

Churning - Using the policy values in an existing life insurance or annuity policy to purchase another life or annuity policy with the same insurer for the primary purpose of generating additional commissions, without a reasonable assumption that the new policy will be much better.

Charitable Gift Annuity - the annuity contract between the insurer, the annuity owner, and the charity. A charitable gift annuity is intended to serve as a gift to a charity rather than income. The policy owner agrees to donate cash, stock, or other assets to a charity. In return, the owner receives a fixed payment (annuity) for life, plus tax benefits. Charitable annuities are not protected by FLHIGA (Florida Life and Health Insurance Guaranty Association) and the donation is irreversible.

Maturity Date - the date on which the company must repay the principal. This term is most often used with life insurance policies and refers to the date the guaranteed cash value of the policy equals the face amount.

Policyowner - the person or entity that has the right to make changes in the contract. These include the right to surrender the policy and a change the beneficiary. The policy owner may or may not be the annuitant.

Prospectus - this legal document is prepared by the insurance company and reviewed by the Securities and Exchange Commission. It contains detailed information regarding each underlying investment's fees and expenses, historical performance, fund management, risks, and investment strategies. Agents are required to provide prospective buyers of a variable annuity with a prospectus at the time of sale. 

Rider - Annuities may contain riders which add benefits to the contract, usually for an additional cost. An example may be a guaranteed income rider which guarantees a lifetime income regardless of the accumulated value of the annuity.

Twisting - is the practice of inducing a policy owner with one company to lapse, forfeit, or surrender a life or annuity policy for the purpose of taking out a policy in another company.

Surrender Charge - most annuity contracts charge a surrender penalty for withdrawals or surrenders that exceed the penalty free amount available, made during the early years of the contract. Usually, the surrender penalty is a percentage of the amount withdrawn. The percentage declines each year until it reaches zero. Your annuity policy will contain a surrender schedule.

You should buy your annuity from an insurance company that is financially sound. There are various ways you can research an insurance company’s financial strength, such as visiting the insurance company’s website or asking your annuity salesperson for more information. You can also review a company’s financial strength rating from an independent rating agency such as A.M. Best Company, Standard and Poor’s Corporation, Moody’s Investor Service, and Fitch Ratings.

If an annuity owner is a Florida resident and the insurance company licensed to sell annuities in Florida becomes insolvent, a fixed annuity will be guaranteed by the Florida Life & Health Insurance Guaranty Association (FLAHIGA) for up to an aggregate amount of $250,000. If the contract has been annuitized before liquidation of the company, then the maximum guarantee would be $300,000.

The Guaranty Association covers only policyholders and certificate holders that were valid Florida residents on the date the insurer is declared insolvent and is liquidated. If you are a Florida resident on that date, you may be covered by FLAHIGA even if you have subsequently moved to another state.

Portions of a variable annuity that are guaranteed by insurer (fixed interest accounts) are covered by FLAHIGA. However, portions of a variable annuity that are not guaranteed by the insurer (underlying investment portfolio options) are not covered by FLAHIGA.

Visit Licensee Search to verify that your agent is licensed.

Agents may have professional designations that indicate they have received additional education or training in areas such as life insurance, annuities, estate planning, and senior benefits. Some of the most common are: Chartered Life Underwriter (CLU); Chartered Financial Consultant (ChFC); FLMI (Fellow Life Management Institute), LUTCF (Life Underwriters Training Council Fellow), and CFP (Certified Financial Planner).

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