What is an Annuity?
An annuity is a contract between you and an insurance company, where you make payments now and the insurance company will pay you immediately or later for a guaranteed income. Regardless of the type of annuity, all annuities do have in common that they will help you accumulate money for retirement and/or they will provide you with a monthly income that will be guaranteed for as long as you will live. Annuities are designed to be both a savings vehicle and a source of retirement income. They offer several of choices for you to grow and protect your income to meet your particular needs.
Types of Annuities
There are two types of annuities that you can purchase, fixed or variable. With a fixed annuity the insurance company will offer a guaranteed rate of interest for the life of your contract. In addition, the insurance companies may also offer a higher interest rate guaranteed for a certain amount of time, such as 10 or 20 years or they could also last your lifetime.
A variable annuity is a long-term investment that will help you group your retirement assets and provide you with retirement income. With a variable annuity you can choose among several investment options, such as stocks, bonds and money market instruments. This gives you the flexibility of investing into one product with several investment options.
Annuities can be purchased with a lump-sum payment, known as a single premium annuity or make an initial payment with additional contributions, known as a flexible premium annuity. You will also have to make the choice when purchasing either type of an annuity if you want the income immediately or for later. These are known as:
- Deferred Annuity - Money will grow tax-deferred before you take out for income.
- Immediate Annuity - This is for people who want to receive their income stream right after you make your initial investment. Immediate annuities are common for people who are soon reaching their retirement age.
There is also an equity-indexed annuity, this is a combination for both variable and fixed annuities. You get the guaranteed minimum interest rate of return and you also get the advantages of participating in the stock market when it is doing well.
Should you Purchase an Annuity?
Here are a list of things that will help you determine if an annuity is right for you, there are limitations with annuities and they are not for everyone:
- Are you in need of help to meet your retirement goals?
- Are you comfortable with the risks involved with an annuity, some are guaranteed and some are not
- Do you have an emergency fund? If you do not have additional money for an emergency then an annuity is not right for you.
- Depends on your age, health and financial situation.
- How soon do you need the income, will depend on which type of annuity to purchase
Advantages of an Annuity
- Deferred tax growth
- Life income payout options
- Multiple investment options
- Guaranteed death benefit
- Flexible withdrawal options
- Tax-free transfer