Annuities are an investment tool that has become more popular in recent years. They’re often used to generate income during retirement and can help investors build a more secure financial future. But not all annuities are created equal—there are different types of annuities with unique features and benefits. In this article, we’ll cover everything you need to know about these investments so that you can make the right decision for your needs.
What is an annuity?
Annuities are a type of investment that can be used to generate income, save for retirement and other future goals.
You can think of an annuity as a contract between you and an insurance company. In exchange for your money—and your agreement not to withdraw the funds before a certain date—the insurance company will pay you periodic payments until you die or the contract expires.
Fixed or variable?
You can choose between two types of annuity: fixed and variable. Which one is right for you depends on a number of factors, including your time horizon and risk tolerance.
Fixed annuities are less risky than variable annuities because they provide a guaranteed minimum rate of return, typically based on the performance of some sort of index fund or market average (like the S&P 500). If stocks rise faster than expected during that period, it’s possible that your investment could lose money—but only if bonds perform even better than stocks over that same time frame. That makes fixed annuities appealing to investors who want protection against market volatility but don’t expect to need their funds any time soon.
Variable annuities, on the other hand, offer higher potential returns but carry more risk because there’s no guarantee that you’ll get back what you put in before death or maturity.* The upside is that if stocks do well while your policy is active—and there’s no guarantee they will—your principal may grow significantly over time.*
What is a deferred annuity?
A deferred annuity is an investment you make with an insurance company, who will hold on to your money (hence the “deferred”) and invest it for you.
You can choose to invest in a fixed or variable annuity, depending on how volatile you want your investments to be. If you have a lot of savings and are looking for stability in income, then a fixed annuity makes sense because it guarantees that your monthly payments will remain steady throughout retirement. However, if you’re willing to take more risk with your money in exchange for potentially higher returns down the road, then investing in a variable annuity might be better suited for your needs. Either way—whether it’s with a fixed or variable option—when you die, any remaining balance of funds will be paid out as per your contract agreement with the insurance company.*
What is an indexed annuity?
An indexed annuity is a type of annuity that is linked to the performance of a stock market index. The premium paid for the contract and the surrender charge will be tied to this index, and if it performs well, you’ll receive a higher return on your investment, If it performs poorly, you’ll receive a lower return or your account value will remain the same. You will not lose principle due to market losses.
Are there tax benefits to annuities?
Annuities are a form of insurance and, as such, provide tax benefits to those who invest in them. The first major benefit is that the money you invest into an annuity is deferred from taxation. This means that you don’t have to pay income tax on the investment until you start withdrawing money from your account; this usually occurs after age 59 1/2.
When do you get your money back?
You can get your money back at any time. If you need to cash out early, there will be a penalty depending on the type of annuity and how long it’s been opened.
You can also make a withdrawal before reaching age 59 1/2 without incurring any penalties or taxes as long as you’ve met certain requirements. For example:
- You have an immediate need for personal funds, such as if someone in your family has passed away.
- Your health has severely declined and the money is needed for medical expenses or caregiving (such as hiring a nurse).
What annuities provide for withdrawal options
Withdrawals options vary depending on the type of annuity you purchase. Some annuities allow you to take out a lump sum, while others allow monthly payments.
- Withdrawals are available in one of three ways: as a lump sum, paid out over time (usually in the form of monthly installments), or through some combination thereof.
- Many retirement accounts offer similar withdrawal options, but not all do.
How much does an annuity cost?
Fees. The cost of an annuity is often noted as the “initial investment,” but that doesn’t tell you much. In fact, there are many different fees associated with annuities and they can vary a lot depending on the type of annuity you’re buying. For example, variable annuities often charge higher fees than fixed or deferred options because they are more complicated products to administer and require more administrative services from insurers. On the other hand, fixed and deferred options generally have lower upfront costs due to their simple nature (e.g., no commissions). In addition to these up-front charges–which may be paid by you or taken out of your account balance–annuities also have ongoing fees that come out of your investment returns each year (if applicable).
What should you look for in an annuity provider?
Think carefully about what you’re looking for in an annuity provider. The below steps will help you find a company that offers the right combination of features, fees and service:
- Check the provider’s reputation. Before purchasing an annuity, make sure you know if it has a good track record. If possible, speak with friends or family members who have purchased an annuity from this particular company and ask them how satisfied they are with their purchase. You can also do research online by searching for reviews from other customers who have used this annuity provider before.
- Check the provider’s financial stability and track record. Make sure that your chosen company is financially stable enough to pay out any benefits owed to you after purchasing one of their products (annuities). You can check this by looking at their rating on websites such as A+ rated insurance companies list by A-rated Insurance Companies List by Forbes Magazine or Top 10 Best Insurance Companies For Life Insurance & Annuities. This will give you an idea of whether their business model is sustainable enough over time so that they’ll be able to continue paying out any benefits owed without fail once those policies begin taking effect down into future years during retirement
An annuity is a great option for retirement income, but it’s important to understand how they work and what you should look for before you sign up. We hope this article has helped you understand how annuities work and what types of them are available. If you want more information about annuities or other financial options, contact us today!