What is an Annuity?
An annuity is a contract with an insurance company funded by a lump sum or a series of payments typically to prepare for retirement. Annuity payments are then made to the customer beginning immediately after the lump sum payment or later on in the customer’s life. The annuity payment from the insurer can be set up as a one-time payment or a sequence of payments. Annuities are typically used to replace regular income during retirement, however there are many other reasons to purchase an annuity. It is important to note that annuity income is taxed as regular income, but does grow tax-deferred.
Annuities can be designed as one-payment or a series of payments across many years—some policies extend to the death of the customer and beyond. There are also annuities that continue to send payments to surviving spouses or children. If payments are continuing until death, the payment may be lower, but knowing that you will never outlive the income is one of the biggest benefits of an annuity.
Why should someone buy an Annuity?
If someone is looking for regular income payments during retirement, annuities are likely a good match. Funds within a deferred annuity can be annuitized after the age of 59 ½ with no penalty. Another annuity option to consider is the immediate annuity, which can be annuitized immediately with no penalty.
What kinds of Annuities exist?
- Fixed Annuities pay the customer a set amount of money. The risk is low, but so is the return typically.
- Variable Annuities pay the customer based on the performance of sub-accounts. The risk is higher, but could also provide a higher return.
- Indexed Annuities provide a guaranteed minimum payout, taking on less risk than Variable Annuities, but more than Fixed Annuities.
What are the benefits of Annuities?
Annuities have no contribution limits, are able to be contributed tax-deferred, and can be used to have peace of mind during working years to know that income will be continued throughout retirement. Those who purchase annuities have no concerns regarding outliving their savings. Annuities have many uses, but one of the most popular reasonings is to take care of their families if the breadwinner passes suddenly.
Would you like to discuss Annuities?
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