What is an Annuity?
What is an Annuity? An annuity is a contract between you and an insurance company. You agree to make periodic payments, either for a fixed term or for the rest of your life. In return, the insurer agrees to make payments to you, also either for a fixed term or for as long as you live.
The advantage of an annuity is that it can provide you with a stream of income that you can’t outlive. That can be especially important in retirement when you no longer have the regular paycheck from a job.
There are two different types of annuities: immediate and deferred. With an immediate annuity, you start receiving payments right away. With a deferred annuity, you postpone payments until some future date.
There are also two basic ways to fund an annuity: with a lump sum or by making periodic payments.
An annuity can provide tax-deferred growth of your investment. That means you don’t have to pay taxes on the earnings until you start taking withdrawals.
The income from an annuity is taxed as ordinary income, not capital gains.
You might want to consider an annuity if:
– You’re looking for a stream of income that you can’t outlive
– You want to defer taxes on the earnings from your investment
– You’re looking for a way to invest a lump sum of money
How do annuities work?
When you buy an annuity, you make a lump-sum payment or series of payments. The insurer then uses that money to invest in a pool of securities, such as bonds, which it uses to pay the annuity benefits. The way the annuity payments are structured depends on the type of annuity and the options you choose. With an immediate annuity, the payments begin right away and continue for a set time, such as 10 years, 20 years, or your lifetime. With a deferred annuity, the payments are postponed until some future date. That date can be when you retire, for example. With both types of annuities, you can choose to receive the payments for your lifetime. If you die before the payments are scheduled to end, the insurer will continue to make them to your beneficiary.
Types of Annuities
Variable Annuities pros and cons written on a blackboard.
There are three common types of annuities: fixed, indexed and variable.
With a fixed annuity, the insurer agrees to pay you a set rate of interest on your investment, and your payments stay the same from month to month. With an indexed annuity, the insurer agrees to pay you based on the performance of the index you select. The indexed funds protect from market losses. With a variable annuity, the payments can go up or down, depending on how the investments in the underlying pool perform.
Some annuities offer guaranteed minimum rates of return, which means that even if the investments in the underlying pool lose money, you’ll still get a minimum rate of return on your investment.
When you’re ready to start taking withdrawals from your annuity, you have several options.
You can take them as a lump sum, or you can choose to receive them as an annuity, which means you’ll get periodic payments for a set period or for as long as you live. You can also choose to receive a combination of the two. The amount of each payment will depend on the type of annuity, the options you choosechose when you purchased the annuity, and how long you’ve been receiving payments.
Why would someone want to invest in an annuity?
There are several reasons why someone might want to invest in an annuity.
One reason is that it can provide a stream of income that you can’t outlive. That can be especially important in retirement, when you no longer have the regular paycheck from a job. Another reason is that annuities offer tax-deferred growth of your investment. That means you don’t have to pay taxes on the earnings until you start taking withdrawals. Okay And finally, annuities can provide a death benefit. If you die before the payments are scheduled to end, the insurer will continue to make them to your beneficiary.
What are the disadvantages of an annuity?
There are some potential disadvantages to consider before you purchase an annuity. First, annuities can have high fees. That’s because there’s a lot of work involved in managing the underlying investments and making the payments over time. Second, annuities are not liquid. That means you can’t cash out your investment if you need the money for an unexpected expense. Typically, an annuity shouldn’t be your only store of wealth. And finally, annuities are subject to market risk. That means the value of your investment can go up or down, depending on how the underlying investments perform.
What is an annuity: The bottom line
An annuity is a contract between you and an insurance company. You agree to make periodic payments, either for a fixed term or for the rest of your life. In return, the insurer agrees to make payments to you, either for a fixed term or for as long as you live.
Annuities can provide a stream of income that you can’t outlive, tax-deferred growth of your investment, and a death benefit.
Before you purchase an annuity, be sure to understand all the fees associated with the contract. And make sure you’re comfortable with the risks involved. Contact us today with your questions and learn how we can help you navigate the world of annuities.