What are annuities?” An annuity is a contract that provides for the periodic payment of income while a person is living. Annuities are a hot topic for retirement planning and this article touches on some important annuity information.
What Are Annuities?
An annuity is a contract that provides for the periodic payment of income. An annuity contract is designed to pay benefits while a person is living. The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.
In order to continue answering “What are annuities?”, the types of annuities must be identified. There are two kinds:
- The first kind is a fixed annuity. Fixed annuities are essentially CD-like investments issued by insurance companies. Like CDs, they pay guaranteed rates of interest, in many cases higher than bank CDs. Fixed annuities can be deferred or immediate. The deferred variety accumulate regular rates of interest and the immediate kind make fixed payments which are determined by your age and size of your annuity during retirement. The insurance company guarantees both earnings and principal.
- The other type is a variable annuity. A variable annuity is a tax-deferred retirement vehicle that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose. At the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio.
Still on answering “What are annuities”, it is relevant to understand that one must consider numerous factors when deciding on whether to invest in annuities and the type to invest in. The factors are:
Tax Deferral – Dollars invested into annuities of any kind will grows tax-deferred until it is withdrawn. Annuities have maximum no limit on the amount of money that can be put into them, and there are also no income levels that disallow any tax advantages. This gives annuities advantages over IRAs, 401ks and other qualified plans for rich investors who can shelter millions of dollars from taxation inside of them.
Guaranteed Payout – Annuitants that choose any type of life payout option can have the piece of mind that they will receive some sort of monthly payment until they die.
Protection from Probate and Creditors – Annuities are generally exempt from creditors in most cases and are unconditionally exempt from probate proceedings.
It is also relevant to understand the disadvantages of annuities when considering what are annuities?
Costs and Fees – Annuities can be one of the most expensive types of investments available because of various fees.
Illiquidity – Most annuity contracts charge large surrender penalties for early withdrawal, plus a 10% premature distribution penalty to investors who take withdrawals before age 59½.
Complexity – Although annuities can provide tremendous benefits for investors when used correctly, they are by nature complex instruments, especially variable annuities.
Finally, before comprehensively addressing “what are annuities”, one should sort after the expertise of an unbiased financial advisor. Some issues need to be discussed in detail and from a personal perspective. Before investing, understand that annuities are not insured by the FDIC, NCUSIF or any other federal government agency, and are not deposits or obligations of, guaranteed by, or insured by the depository institution where offered or any of affiliates. Annuities that involve investment risk may lose value.
Following are a few helpful Annuity links:
The above information is not intended to substitute specific individualized tax, investment or legal planning advice. Where you need specific advice, please consider consulting with a professionally qualified and certified investment manager, financial planner, CPA or tax advisor.