What is an Annuity?
An annuity is a type of policy issued by an insurance company that allows you to save money for retirement. The money you pay in can be either a lump sum or a number of payments. These contributions then earn interest, generally tax-deferred, and after a period of time, provide you with a stream of income.
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Types of Annuities
There are two main ways to categorize annuities: immediate vs. deferred annuities and fixed vs. variable annuities. The immediate vs. deferred category has to do with when your income payout begins. The fixed vs. variable category has to do with how your contributions are invested.
Immediate Annuity vs. Deferred Annuity
With an Immediate Annuity, your money provides guaranteed payments to you that begin soon after you make your initial payment. Depending on the tax-qualified or non-tax-qualified status of your annuity, a portion or the entire payment can be included in your taxable income. The owner can elect to receive guaranteed payments for life, or elect payments to be made over a specified length of time (period certain).
With a deferred annuity, your income payments are usually put off for a period of time allowing the money you've invested to earn interest generally tax-deferred. You choose when you want to start receiving income payments — typically, upon retirement.
Acceleration of Payments
For Guaranteed Income "immediate annuities," an Acceleration of Payments Provision is available. This provision allows remaining certain period income payments to be accelerated after the first policy year. If the unexpected happens (home repair, medical bills, or family emergency), it's nice to know you have options. Minimums apply, and partial accelerations are limited to one per policy year and must be at least $5,000. Annuity income payments will be reduced, and a market value adjustment may apply. Acceleration of Payments is not available in NJ, PA, TX, and WA. Contact your local State Farm® agent for specific details and restrictions.
Fixed Annuity vs. Variable Annuity
With a Fixed Annuity, money is placed in fixed-rate investments such as bonds, where it will earn a fixed interest rate for a certain period of time. For most fixed annuities, a minimum interest rate is guaranteed. With a Fixed Annuity, the insurance company is taking the investment risk.
With a Variable Annuity, money is placed in market-based investments. This may include stocks, bonds, mutual funds, or money markets. You may have the option to move the money around among the different investments. In addition, the rate of return can vary based on the performance of the investments. With a Variable Annuity, the risk is taken by the annuitant, rather than by the insurance company.
Deferred annuities can also be a good way to help increase your retirement savings. The tax-deferral and compounding of interest provided by an annuity can help it to grow larger than an equal investment in a taxable account. Gains will be taxed as ordinary income once the money is withdrawn. Annuities can also be used to fund traditional IRAs, Roth IRAs, and Simplified Employee Pension Plans. (Income tax-deferral is provided by the retirement plan.) You should contact your attorney or tax advisor for more complete information.
|Plan Type||Tax-Qualified Plans||Non-Tax-Qualified Plans|
|Plan Name||Business Retirement Plans TSA/403(b) Plans Traditional IRAs||Roth IRA||—|
|W-2 Earned Income Required||Yes||Yes||No|
|Contribution Age Limit||Yes, age 70 for earned income.||No||No|
|Mandatory Distributions||Yes, starting April 1st, the year you turn 70 1/2.||No, for a qualified distribution.||No|
|Distributions Taxable||Yes||No, for a qualified distribution.||Only the interest earned is taxable; you do not pay tax on the principle.|
More about Annuities
The death benefit is the value of the policy on the date of the annuitant's death. If you die before payouts begin, your beneficiary will receive the current value of the annuity. Once you've begun receiving payments, the amounts paid to the beneficiary will depend on the payout agreement.
With almost all annuities, the cash value of the policy will be left for your beneficiary. Your agent can help you set up your annuity to make sure the money will be passed down to your beneficiary.
State Farm Annuities Products
Looking for information on discontinued State Farm Annuities products? Our product archive provides resources that can help answer your questions.
Before investing, consider the funds' investment objectives, risks, charges and expenses. Contact State Farm VP Management Corp (888-702-2307) for a prospectus containing this and other information. Read it carefully.
Investing involves risk, including potential for loss.
Variable annuities are long-term investments designed for retirement purposes.
Variable annuities have fees and charges that include mortality and expense, administrative fees, fund expenses and may include surrender charge, transfer processing fee and additional deposit rider charge.
Bonds are subject to interest rate risk and may decline in value due to an increase in interest rates.
An investment in the Money Market Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
Guarantees are based on the claims-paying ability of the issuing State Farm Life Insurance company.
Withdrawals made prior to age 59½ are subject to a 10 percent federal-income-tax penalty.In a tax-qualified retirement plan, federal-income-tax deferral is provided by the tax-qualified retirement plan. No additional tax deferral is provided by an annuity. You should contact your attorney or tax advisor for more complete information.
Insurance policies and/or associated riders and features may not be available in all states, and policy terms and conditions may vary by state.
Not FDIC Insured
- No Bank Guarantee
- May Lose Value
State Farm Life Insurance Company (Not licensed in MA, NY or WI)
State Farm Life and Accident Assurance Company (Licensed in NY and WI)