Annuities are term deposits with insurance companies. They are similar to certificates of deposits at the bank (note: bank deposits are FDIC insured while the issuing insurance company guarantees annuities). There are two types of annuities: fixed and variable.
Fixed Annuities Explained
Fixed annuities have these general features:
• Your principal is guaranteed by the claims-paying ability of the insurance company; it will never decline.
• The insurance company adds interest to your deposit each year.
• The annuity is for a specific term that you select. Generally, the longer the term, the higher the interest.
• All interest is tax deferred (you do not report it on your tax return) until withdrawn.
• You may withdraw 10% of your balance annually.
• If you withdraw more than 10% during the term, you will pay withdrawal penalties (called surrender charges).
Most fixed annuities offer an initial one-year rate and then the rate changes each year. A few companies offer a locked-in rate for the entire period (called multi-year gaurantee annuities).
Another type of annuity is called a variable annuity.
Variable Annuities Explained
With this type of annuity, rather than receiving interest from the insurance company, your money is invested in mutual funds. You may earn more or you could lose principal, depending on the mutual funds you select.
Maybe the best choice is an index annuity.
Index Annuities Explained
In this type of annuity, your principal is guaranteed, like the fixed annuity, but your interest each year is based on increases in the S&P 500 Index. So, your interest is tied to the performance of the stock market but you can never lose your principal. You get the guarantee of a fixed annuity, with the potential profit of a variable annuity.
Everything described up until this point describes the growth phase (called the accumulation phase) of the annuity. To see how much you'll have at the end of the accumulation pahse, you can use a fixed annuity calculator.
When and how do you get your money out? At the end of the term, you have three options:
You can leave the annuity alone and continue to let it grow.
You can exchange the annuity to another company that may pay you a higher rate.
You can start to make withdrawals.
The withdrawal phase is called the distribution phase. You have three options:
You may withdraw all of your money at once
You can withdraw some money each year based on your desires
You can annuitize the policy.
'Annuitizing' means that you accept fixed monthly payments from the annuity company. The payments can span your lifetime or be limited to a specified period (e.g. 10 years). At the end of the period you select, the annuity is completely paid out. If you select a lifetime payout, the payments will continue for as long as you live.
As you might imagine, the monthly payments are usually more for a fixed 10-year payout than if you select a lifetime payout (the option, which pays the most, depends on your age).
Annuitizing may or may not be a good deal and will depend on your circumstances.
If you are single and need to maximize your monthly income, the lifetime payments may be a very good deal. On the other hand, if you want to leave money to your heirs, annuitizing would not be good because there will be nothing left at the end of the annuitization period.
Immediate Annuities Explained
An immediate annuity has no accumulation phase. It is for supplemental retirement income and almost like receiving a 2nd social security check. You make a deposit with the insurance company and immediately begin receiving payments. These annuities are generally suited for senior investors (age 70 plus) who desire to increase their monthly income.
annuities explained
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The lifetime annuties sound like a good idea for retirement income. One thing i know is you have to make sure the company you buy one from is a good company and is in good financial shape.
We've been using variable annuities for the past few years and have done pretty well (luckily) despite current economic conditions. I suppose we made some good mutual fund decisions, although we're considering switching to a Fixed now.
I like the idea of variable annuities as opposed to having a fixed annuity
I've always heard negative things about lifetime annuities, but maybe I was missing something. I didn't know they were good for retirement. I suppose making sure the seller is reputable is pretty important.
I think variable annuities have a great future.
Thanks for the article.
I agree use an annuity calculator to ensure you get a good comparison between the different annuities.
The nice thing about a lifetime annuity is that if you live longer (which is hopefully the case for all of us) then you keep getting paid monthly payments even if it extends beyond the amount of principal you paid in to the annuity in the first place. The fees can eat away at the return a little too much for my taste, but I really love the idea of payments for life, especially with the market over the past few years.
Annuities Explained. An annuity is a retirement product in which you make one or more contributions to an insurance company.
I prefer fixed term annuities as you can get another bite of the cherry at the end of the fixed term. This means at this point you may qualify for enhanced rates.
My mother-n-law is considering a fixed annuity for 130k in the names of her daughters in order to qualify for VA pension assistance of $1065/mo. Is there a better option? A trust?
An annuity calculator is an excellent tool to help find the right options you need within your annuity. For Income Drawdown it is equally important to find the income drawdown calculator.
Kevin
The number of people investing in the annuities has increased. This is because annuities are safe investments and it is a flawless retirement investment plan
I have been researching annuities and see if they are a good investment for my future. They seem almost flawless and everyone should give them a chance for a great retirement.
What would happen if the company that you have chosen goes out of business or goes bankrupt, do you have some financial security somewhere?
very perfect explanation about annuities, tq my brother ^^
I suppose making sure the seller is reputable is pretty important. Been researching annuities and see if they are a good investment for my future.
I prefer fixed-term annuities as well. I believet hat education is the key to understanding annuities!
Variable annuities are the way ahead. We need to make on more than we put in.
To be honest never heard a thing about lifetime annuties. It seems to be really good idea to invest money.
Using this annuity calculator to determine regularly scheduled payouts for immediate fixed annuities and single premium immediate annuities (SPIA) is very useful and common.
A major benefit of taking your annuity later than sooner is the higher annuity benefit. This, in turn, reduces longevity risk. The erosive effects of taxation and inflation work against both your retirement savings and retirement income. While immediate annuities do not have a maturity date, the date of purchase is effectively the date of maturity. Immediate annuities can assist with reducing taxation and some can provide income that is linked to market performance.
It isn’t enough to find out how much money a client has sitting in bank accounts and retirement investments.
Why would one chose such strategy when there is Life Insurance+Retirement Plan+Deposit with Interest strategy. I mean, in E.U there are insurance companies which will offer all this at fair rates. For example, if i want a retirement plan i have to pay around 3.000 Euro / year , and after 15 years i will have a guaranteed income of 600 Euro/month. Another benefit is the fact that you can always ask for a loan from such a company. Also, if you pay 10 years of of 15 and you decide you want all your money back, and quit that retirement plan, they will offer that amount + 10% (per year) interest for those 10 years. So, i would love to see such offers in U.S. too.
Lucian from military financing
That is to say, at no point does the investor ever own any variable type of security like a stock, bond or mutual fund within the EIA account. What would happen if the company that you have chosen goes out of business or goes bankrupt.
I find your explanation about life annuities easily understandable due to its concise nature. With this, the would-be senior citizens will have a deeper understanding on this benefit that acts like a second pension check. Also, this is a pretty good idea for the ones who deals with resell SEO and have a smooth life with the fine financial future ahead of them.
Annuities can offer many benefits to the individual investor to meet their long-term investment needs, such as retirement planning. The basic insurance feature embedded into annuities offers a measure of protection for investors against market downturns. Returns can also grow in a tax-sheltered environment until the money is withdrawn. The basic different types of annuities offer slightly different benefits depending on what is required and what the risk level is of the individual annuity investor.
I can say that both fixed rate annuities and variable annuities are great as post-retirement investments, and both can provide tax-deference and death benefits. But while the fixed rate annuities are for the more conservative investor, who wants a fixed return, the variable annuity is for the risk taker, who is confident of using his or her own skills to get better returns.
An annuity is an contract made between a person and an insurance company, that will help provide a regular income in exchange of a lump-sum pay or the investments made over a period of time to the insurance company. If you are thinking of investing your money to make your retirement safe and secure financially, then annuity is the best retirement product.
Great article, easy to follow and understand. The word annuities can often lead people into believing it is something weird and wonderful, when in fact, it is simple banking with attachments to it.
f you live longer (which is hopefully the case for all of us) then you keep getting paid monthly payments even if it extends beyond the amount of principal you paid in to the annuity in the first place. The fees can eat away at the return a little too much for my taste, but I really love the idea of payments for life, especially with the market over the past few years.
Annuities are tax deferred, this basically means that the money invested in annuities is not taxed until you are ready to make a withdrawal or begin to receive income payments. Annuities allow you to create an investment portfolio that can take care of your short term as well as long-term financial needs. You can invest in more than one annuity and benefit from the different features that they provide. They are an excellent investment options for all types of investors, especially those who wish to ensure the financial security of their retirement years.
he basic insurance feature embedded into annuities offers a measure of protection for investors against market downturns. Returns can also grow in a tax-sheltered environment until the money is withdrawn. The basic different types of annuities offer slightly different benefits depending on what is required and what the risk level is of the individual annuity investor.
n E.U there are insurance companies which will offer all this at fair rates. For example, if i want a retirement plan i have to pay around 3.000 Euro / year , and after 15 years i will have a guaranteed income of 600 Euro/month. Another benefit is the fact that you can always ask for a loan from such a company. Also, if you pay 10 years of of 15 and you decide you want all your money back, and quit that retirement plan, they will offer that amount + 10% (per year) interest for those 10 years. So, i would love to see such offers in U.S. too.
While annuities can be useful retirement planning tools, they can also be a lousy investment choice for certain people because of their notoriously high expenses. Financial planners and insurance salesmen will frequently try to steer seniors or other people in various stages toward retirement into annuities. Anyone who considers an annuity should research it thoroughly first, before deciding whether it's an appropriate investment for someone in their situation.