Navy Mutual annuities
Annuity Basics

Navy Mutual is my go-to for financial planning that doesn't fluctuate with the markets and provides an excellent value. The Association is honest and cares, which matters to me.

- Paul K., Member since 2016
What is an annuity?

An annuity is a contract that allows you to contribute a series of premium deposits or a lump-sum amount to an insurance company in exchange for the guarantee of interest accumulation and options for future income payments.

What is the difference between life insurance and an annuity?

Life insurance is designed to meet the needs of survivors by leveraging premium payments during your lifetime into a tax-free death benefit for the beneficiary. This death benefit can be used to replace lost income, offset debts, or, in some cases, pay for expenses associated with chronic or terminal illness. An annuity, on the other hand, is used to either accumulate assets for retirement purposes or generate income during your lifetime or the lifetime of your beneficiary.

Life insurance is most commonly funded with a series of premium payments earlier in life and provides a large tax-free benefit at the end of life; whereas annuities are designed to accumulate large lump-sums that are often paid out as a series of income payments during retirement.

Who can purchase an annuity?

Navy Mutual annuities may be purchased on the life of a Navy Mutual member or their spouse, child, or grandchild. Check your eligibility here. Note that age requirements may vary by product.

Are there different types of annuities?

Yes, deferred and immediate.

deferred annuity pays you in the future. It is designed to grow a sum of money in a tax-advantaged way, with the option to initiate income payments later on. Prior to the distribution of payments, earnings accumulate on a tax-deferred basis, meaning that you do not pay any taxes on interest earned until you begin to receive payments from the annuity.

An immediate annuity starts a guaranteed income stream right away, with payments beginning within one year of the contract purchase date. Immediate annuities are funded with a lump-sum deposit and are typically used as a tool to spread out income taxation or reduce the risk of outliving assets.

What is the difference between a single premium annuity and an installment premium annuity?

single premium annuity is funded through one lump-sum payment. Often this lump sum comes from liquidating other assets such as a business interest, 401(k), IRA, home equity, or an investment portfolio.

An installment premium annuity allows you to make future payments in addition to your initial premium contribution. It is funded over time through additional scheduled or unscheduled premium contributions and is a great option for those who are still working but want to secure a fixed income stream as part of their retirement savings plan.

How are premium contributions invested?

Your premium deposit(s) will be invested by the insurer with the objective of increasing accumulation value over time. There are three basic models for investing the principal.

  1. Fixed – Guaranteed Return: With a fixed annuity, you deposit a lump sum or series of premium contributions with an insurance company and receive guaranteed principal and interest payments in the future. Your principal contribution is guaranteed to not decrease. The insurance company can provide these guarantees because it invests your money primarily in bonds or other conservative, fixed investment instruments. This type of annuity typically offers the lowest risk, and often provides a higher interest rate than a savings account, Money Market account, or Certificate of Deposit (CD).
  2. Indexed – Hybrid Return: An indexed annuity embodies some of the characteristics of both fixed and variable annuities. Like a fixed annuity, indexed annuities offer a guaranteed minimum interest rate, but they could potentially credit an interest rate linked to performance of a market index, such as the S&P 500. In years when the market does well, the annuity credits an interest rate higher than the guaranteed minimum, but in years when the market does poorly, the annuity is credited the guaranteed interest rate – which may be lower than that of a fixed annuity. There are several types of indexing methods used to calculate interest credits within this type of annuity and larger administration charges required to support contractual guarantees, so it is important to understand not just which index an annuity may be linked to, but also the methodology used.
  3. Variable – Performance Based Return: With a variable annuity, you are investing directly in stock (equity) assets and choose the underlying investment portfolio, so the annuity’s value fluctuates up and down based on changes in those asset prices. If the portfolio of investments performs well, your returns may outperform those of a fixed or indexed annuity. However, if they do not perform well because of poor market conditions or contribution and distribution timing, your investment principal is exposed to risk of loss. While the risk is higher with a variable annuity than with a fixed annuity, there is also the potential for a higher reward.

Note that both indexed and variable annuities typically offer riders which for an extra fee can guarantee a certain amount of withdrawal or life contingent income.

Navy Mutual only offers fee-free fixed annuities.

Why annuities?


Safety

Annuities can provide guaranteed income for the duration of your entire life. This is different from your IRA, 401(k), or TSP, where it is possible for your withdrawals to cause a zero balance. Annuity payments will never cause a zero balance if you choose a life income payout option.

Ease

You know how much money you will get each month (quarter, year) from an annuity, making budgeting simple. Furthermore, once you have made your premium deposit(s), you will receive your payments without having to log in to any accounts to move money around.

Tax Savings

Premium contributions are made with after-tax dollars; when those deposits are ultimately returned in income payments, a portion is tax free – this is known as an exclusion ratio. This means that the owner gained more interest due to tax deferral while accumulating and pays fewer taxes in retirement when income payments begin.

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Deferred Annuities

A deferred annuity is designed to grow a sum of money in a tax-advantaged way, with the option to initiate income payments later. Prior to the distribution of payments, earnings accumulate on a tax-deferred basis, meaning that you do not pay any taxes on interest earned until you begin to receive payments from the annuity.

Immediate Annuities

An immediate annuity starts a guaranteed income stream right away, with payments beginning within one year of the contract purchase date. Immediate annuities are funded with a lump-sum deposit and are typically used as a tool to spread out income taxation or reduce the risk of outliving other assets.