What is an Annuity?
Annuities are products that provide a fixed income stream. They are highly customizable and offer tax benefits, protection against loss of investment and options to transfer money to your beneficiaries. Annuities guarantee income for life and help fund a spectacular retirement.
How an Annuity Works:
Annuities are designed to provide a steady cash flow during the retirement years and to reduce the fears of outliving your assets. Since these assets may not be enough to sustain their lifestyle, some investors may turn to an insurance company or other financial institution to purchase an annuity contract.
There are various annuity products that are appropriate for annuitants, who want guaranteed retirement income. Because invested cash is not easily converted into cash and is subjective to withdrawal penalties, it is not recommended for millennials or for those who need to access their cash quickly.
The two stages an annuity goes through are called:
The accumulation phase, this is the period of time that an annuity is being funded and before payouts begins. Money invested in the annuity grows on a tax-deferred basis during this stage.
The annuitization phase happens once payments commence.
These financial products can be immediate or deferred. Immediate annuities are purchased by individuals of various ages who have received a large lump sum of money, such as a settlement or lottery payout. Deferred annuities are structured to grow on a tax-deferred basis and provide annuitants with guaranteed income that begins on a specified date.
Types of Annuities:
Fixed annuity- The insurance company promises you a minimum rate of interest and a fixed amount of periodic payments. Fixed annuities are regulated by state insurance commissioners. Please check with your state insurance commission about the risks and benefits of fixed annuities and to confirm that your insurance broker is registered to sell insurance in your state.
Variable annuity- The insurance company allows you to direct your annuity payments to different investment options, usually mutual funds. Your payout will vary depending on how much you put in, the rate of return on your investments, and expenses. The SEC regulates variable annuities.
Indexed annuity. This annuity combines features of securities and insurance products. The insurance company credits you with a return that is based on a stock market index, such as the Standard & Poor’s 500 Index. Indexed annuities are regulated by state insurance commissioners.