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What Are Annuities

If you’re looking into new insurance plans then you may come across the word “annuity”. But what is it? It’s just a contract, though it is a specific kind of contract. It requires your insurer to make regular payments to you. The exact details are determined and agreed upon by both participants. You could agree to several large payments, smaller payments over a longer period of time, or even a single large lump sum.

Why Buy Annuities?

The main benefit of annuities is income management during retirement. This is done in one of three ways:

  • Regular payments for a specific length of time. The time is varied, based on the agreement stipulated in the contract. It could be the length of your life, or it may be the length of another person’s life.
  • Death benefits. Should you die before the specified payment time, then whoever you’ve listed as a beneficiary gets the listed payments.
  • It allows you to grow your income via deferred-taxes. Income and gains via annuity are tax-free until you actually withdraw money from your account.

What Are The Types Of Annuities?

You can get one of three types of annuities: variable, indexed, and fixed. Here’s a quick explanation of how they work.

Fixed Annuity:

With a fixed annuity you get a specific amount at regular intervals. This often comes with a small rate of interest. The state insurance commissioners regulate fixed annuities. Make sure you check with your state insurance commission before you sign a contract. Your insurance broker must be registered in order to sell insurance legally, so you’ll need to check for that.

Variable annuity:

If you want your payments to go directly to investment options, then you want a variable annuity. How much you get in payout will depend on how much you put in. The rate of return is also a factor, as are your expenses. Variable annuities are regulated by the U.S. Securities and Exchange Commission.

Indexed Annuity:

Indexed annuity combines securities and insurance product features. This can be quite beneficial if you’re investment oriented. You can get a return credit based on a stock market index. Which index is up to you. Like fixed annuities, these are regulated by state insurance commissioners.

What are the benefits and risks?

Annuities are great to help ensure savings for your retirement. Since you’ll no longer receive a salary, you’ll be able to get regular payments so you still have money. Annuities have two phases; accumulation and payout.

During accumulation, the goal is to make payments. Your payments will be placed into various investment options. You can also pay money into an account that offers a fixed interest rate.

During payout, you get your money back. However, you’ll also get any investment income, as well as any gains. At that point, you can take out a lump-sum. Alternatively, you can go with a regular payment.

Any investment you choose will carry a risk. Make absolutely certain you’re considering how solid your insurance company is in terms of finances. If the company goes bankrupt before you get your payout, then you’re out of luck.

It’s incredibly important to understand that annuities aren’t a 100% effective safeguard. Things can and will happen that will knock them out of place. If something happens to change the law, that could also cause problems. So make certain you’re getting the type of investments you want.

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