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What are annuities?
Annuities are investments that you purchase from an insurance company. In exchange for a premium(s) up front, you're guaranteed a cash payment at preset intervals throughout the life of the annuity.
How and when would an annuity help me?
An annuity provides regular, dependable income. While the reasons for purchasing an annuity are many, annuities are used primarily to provide living expenses in the event of retirement and/or disability.
Annuities are an essential part of any well designed financial plan. Your life insurance company will probably suggest an annuity to help you prepare for your financial future.
What are the most common types of annuities?
- Fixed annuities - Fixed annuities earn a guaranteed interest rate for a set term (for example: one year, five years, ten years, even life). Once the guarantee period has elapsed, a new interest rate is set depending on the prevailing market interest rates at that time.
- Variable annuities - Variable annuities often consist of other types of investment options, such as stocks and bonds. Unlike fixed annuities, the returns from variable annuities fluctuate and they aren't guaranteed. They can also lose their value (or even become worthless) if the companies behind those stocks and bonds go out of business.
- Immediate annuities - Immediate annuities are usually purchased with a single lump-sum payment, and they guarantee a fixed payment that begins immediately after you pay the premium.
An immediate annuity can be set up to pay this fixed amount for the rest of your life, or for a set time period (even if that time period ends up being longer than your life). Should the annuity outlive you, the remaining payments would go to you designated beneficiary(s).
- Single premium deferred annuities (SPDA) - Single premium deferred annuities are purchased with a single lump-sum payment. They pay a guaranteed rate of return for a set amount of time, but you take your payment(s) at a later date and the taxes on the interest earned is deferred until you actually receive the payment(s). SPDAs are often used as part of a retirement plan.
- Charitable gift annuities - A gift annuity is a contract between you and a foundation where you agree to donate (a usually large) sum of money in exchange for future payments (which include a set interest rate). You can typically specify whether you want the annuity to be an immediate annuity or a deferred annuity.
The benefits of annuities:
- Annuities guarantee a safe, fixed monthly income for the rest of your life.
- Unlike life insurance policies, annuities do not require a medical examination.
- Annuities can be structured so that you'll never outlive your income.
- The taxes on the interest earned from annuities
are often deferred until you actually receive the
payment(s), allowing you to earn compound interest!
Conclusion
Annuities are an essential part of any effective long-term financial plan. They help ensure that you'll have the money you'll need to live on for the rest of your life.
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