Bonds & Annuities

Insurance Bonds or more commonly known as “surety bonds” are a type of insurance that guarantees payment to the Obligee (the party that receives the obligation) if the Principal (the party performing the Contracted Obligation) fails to uphold his responsibilities or promises to the Obligee.  The payment is made by the Surety (the party that upholds the Principal’s promise to the Obligee).  It may sound confusing to begin with but it’s mostly an assurance that what was promised will be fulfilled and surety bonds are applicable to a number of different businesses.  There are three main types of surety bonds.

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Bonds

Insurance Bonds or more commonly known as “surety bonds” are a type of insurance that guarantees payment to the Obligee (the party that receives the obligation) if the Principal (the party performing the Contracted Obligation) fails to uphold his responsibilities or promises to the Obligee.  The payment is made by the Surety (the party that upholds the Principal’s promise to the Obligee).  It may sound confusing to begin with but it’s mostly an assurance that what was promised will be fulfilled and surety bonds are applicable to a number of different businesses.  There are three main types of surety bonds.

Contract Surety Bonds

Contract surety bonds guarantee the completion of a specific contract between parties.  Often used in the construction industry to ensure that a specific project will be completed, contract surety bonds may include the following types of bonds:


  • Bid Surety bond – Basically a bid surety bond guarantees that once a contractor Has placed a bid  and was awarded a project, then the next step is to purchase a Performance Surety Bond so that he can proceed with the project.
  • Performance Surety Bond – To guarantee a successful completion of a project, a performance surety bond will be secured by a Contractor in favor of his client.  If for whatever reason the Contractor fails to finish construction according to the agreed terms between him and his client, the client can claim financial compensation with a maximum limit of the amount of the Performance Surety bond.  The Surety may also provide a replacement contractor to complete the job.
  • Maintenance Surety Bond – When required, Contractor may also be required to guarantee the maintenance of a building he constructed for a certain period of time with a Maintenance Surety Bond.

Commercial Surety Bonds

Contract surety bonds guarantee the completion of a specific contract between parties.  Often used in the construction industry to ensure that a specific project will be completed, contract surety bonds may include the following types of bonds:


  • License and Permit – When you have to be under contract with the government, especially with respect to federal, state or municipal projects, a License and Permit bond is often required as a means of compliance with an underlying law, statute, ordinance or regulation.
  • Court – A court surety bond is the general term for different types of surety bonds that the court requires. They may be “judicial” that arise out of litigation or “fiduciary” which ensure that people entrusted with the care of other people’s property will perform their duties honestly.
  • Public Official – those who have been elected by the people need to be held accountable in the performance of their duties. The Public Official Bond guarantees that public officials be honest and faithful in their respective positions

Fidelity Bonds

There may be cases when an employee steals from the company that he works for. In situations like this, a company may be covered and be able to recoup the losses from the theft if the company has Fidelity Bonds which covers for this specific purpose.

Annuities

An annuity is a type of insurance that encourages people to save money, either in lump sum or in regular payments, over a period of time.  It is mostly pitched as a retirement investment option because it allows the insured to receive his money in regular payments, like a steady stream of income.

Key elements of an Annuity

The Two Phases of Annuity

An Annuity consists of two phases. The first is the accumulation phase where the insured regularly deposits premiums/payments to the insurance company over a period of time or in one deposit. Depending on the type of annuity that you chose (whether fixed or variable), your investment may earn interest which adds to the total investment amount that you can withdraw when the time comes.

The second phase is the annuitization phase which is the period in which you can begin to receive your regular payments until the term ends or until you die.

Conditional Death Benefits

An annuity is different from a life insurance which typically guarantees death benefits to your beneficiaries upon the insured’s death. With Annuities, you can receive death benefits, or rather, your beneficiary can receive whatever amount you contributed to the annuity provided the insured’s death occurred before the account annuitized. However, if the account has already started paying out regular payments to the insured, say at age 65, and then the insured dies at age 67, the insurance company no longer needs to continue paying to the beneficiaries. If you want guaranteed death benefits, you need to consider term certain annuities.

Tax-deferred Income

While you haven’t received any payments from your annuity, the money in the account will continue to earn interest and will be tax-deferred until such time when you begin receiving your payments.

Types of Annuities (based on how your money is invested)

Fixed Annuities

When you invest your money, whether in banks or as an insurance policy, you expect a certain rate of return. With Fixed Annuities, your money earn interest at a fixed rate as determined by the insurance company. There is very little risk which some people may prefer.

Variable Annuities

Opposed to Fixed Annuities, variable annuities are more dynamic since the money that you contribute to your account is invested by the insurance company. Depending on how well your investments are doing, you may end up with more money than you started with. The upside to this is you will end up with higher payments when you annuitize. However, if your accounts don’t do so well, then you may end up losing money which will affect the amount that you’ll receive when you begin receiving your money.

Types of Annuities (based on when you want to receive payments)

Immediate Annuities

Immediate annuities often begin as soon as you have deposited your initial investment. With this scheme, you no longer want to wait for your money to grow, like in a variable annuity, and will be satisfied with a fixed rate of return over time.

Deferred Annuities

Deferred annuities usually allow your investment to grow over a period of time and you decide when you want to receive regular payments.

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