Annuities are investments that offer investors many unique benefits. Think of them as the opposite of life insurance. Insurance protects you financially against dying too soon. Annuities try to protect you against living too long and having your funds run out prematurely.

 An annuity is an agreement between an investor and an annuity provider (customarily an insurance company). The investor agrees to place money in the annuity, and in return, the provider agrees to pay the investor an income, usually for life. Annuities are also popular with investors who want tax-deferred income until withdrawal begins.
 
Annuities offer the following unique benefits:

• They are tax-sheltered.
• They provide income.
• They qualify for direct rollovers.
• They allow investors to bypass probate.
• They can be exchanged for another annuity.
• They may reduce taxes on Social Security.

Major Types of Annuities
 
In a fixed annuity, the principal amount invested grows at a fixed rate of interest for one or more years, and the investor knows from year to year how much money is being earned. This form of annuity places the investment risk on the insurance company; and if the investment performance is insufficient to fund the promised rate of interest, the insurance company must make up the difference.
 
A variable annuity has no fixed rate of interest. It has many sub-accounts, including a fixed account. Earnings depend on how the sub-accounts perform in the market. The key is to diversify in the sub-accounts with some bonds, growth and income accounts and growth accounts. They also give the investor the flexibility to change the investment as his or her circumstances change. You need to be aware that investment return and principal value of an investment will fluctuate. Shares, when redeemed, may be worth more or less than their original cost.
 
An indexed annuity is tied to a stock market index such as the S&P 500. This type of annuity allows the investor to participate in market gains and at the same time protects them from market declines. There are a number of these annuities available, each with it's own unique features. The common denominator, however, is market participation without principal risk. The market participation varies, as do minimum guarantees. While the market may or may not increase, most contracts offer a minimal rate plus a return of the original principal. The guarantee is based on the claims-paying ability of the issuing life insurance company and the guarantees do not apply to the investment performance or safety of the underlying funds in the annuity.
 
There are also several purchase and payout options associated with specific annuities.
 
Purchase Options
 
A single-premium annuity is a good choice for an investor who wishes to make an investment all at one time without adding to it later.
 
Flexible annuities enable investors to add funds in amounts from $50 - $99 monthly or quarterly. Additions of $100 or more can be made whenever they choose to their initial investment.
 
Payout Options
 
As the name suggests, an immediate annuity starts making payments to the investor immediately, usually within one month. It is designed for investors who want to convert accumulated capital into income payments that begin right away. The owner may not withdraw any cash beyond the regular payments, and must relinquish control of the principal once payments begin.
 
A deferred annuity allows the investor to postpone payments. This is the most common type of annuity which provides the opportunity for the investment to grow over time, increasing in value.
 
Tax Considerations of Annuities

When annuity payments begin, only part of the payment (the previously untaxed earnings growth) is subject to income tax. Your annuity company will tell you how much out of each payment will be excluded from taxes determined by a formula called the exclusion ratio. The original principal invested with after-tax dollars is not subject to taxation, and the previously untaxed earnings may be taxed at a lower rate depending on the annuitant's age and income level.
 
A tax-deferred annuity can be an important part of your long-term savings and retirement strategy, but needs to be tailored to your unique situation. The Investment Representatives located at Farmer’s and Merchants can help you find out more about how this investment option could fit into helping you save on taxes today and secure income for tomorrow.

Securities and insurance offered through BI Investments, LLC, member FINRA and SIPC. BI Investments is associated with Farmers & Merchants Bank. Farmers & Merchants Financial Services, Inc. is a non-bank affiliate of Farmers & Merchants Bank.