According to Investopedia.com, Annuity is defined as:
“A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years.”
Annuities are gaining importance as a source of income for retirees. Annuities offer multiple benefits including protection for your saved money, gain returns on your annuities, and receive a regular stream of income from your investment.
Are you planning to purchase annuities? If yes, it is important to be aware of the major benefits of annuities and right annuities for you. Most of the insurance companies offer flexible annuity schemes for investors.
Two major advantages of annuities:
- Tax benefits: Annuities offer a similar tax advantage as that of 401(k) and you do not need to pay taxes until the earnings are withdrawn. However, you might face a tax penalty is the money is withdrawn before 59 ½ years of age.
- Beneficiary passing: Every retirement product including 401(k) investments and IRA allow you to elect a beneficiary in the event of death. The same holds true for annuities and you can pass on the money to your beneficiaries easily.
What are the different types of annuities?
- Fixed Annuities: In a fixed annuity, the investor pays a lump sum amount to the insurance company for a fixed time, and the insurance provider offers a particular rate of interest on your investment. You can get certificate of deposit from your insurance provider.
- Variable Annuities: Experts often call variable annuities as mutual funds with the benefits of insurance. You can invest in different types of variable annuity funds such as growth funds (stocks), bonds or income funds, and balanced investment options. Variable annuities offer an additional death benefit that the investor would receive. Under this benefit, the investor cannot receive an amount less than the original investment made by the investor.
- Immediate Annuities: Most of the investors are aware of immediate annuities. Under immediate annuities, you pay a lump sum amount of cash to the insurance company and receive monthly payments in return. You can choose the period of regular monthly payments, which may last for few years and up to your whole life. The monthly payments depend upon the amount you are paying to the insurance company.
Is annuity the right choice for you?
It solely depends upon your financial circumstances and personal choices. There is a significant difference in different types of annuities and it is important to compare them before purchase.
How to compare different annuities?
- Fixed annuity: Compare surrender fees and rates
- Variable annuity: Compare surrender fees and performance
- Immediate annuity: Compare monthly income and flexibility
Choosing annuity is a difficult task and you should back your choices with proper research. It is best to avoid commission-based services because they often tend to push customers towards more profitable policies (Profitable for the Brokers!).