5 Times When an Annuity Might Be Right For You
If you're currently planning your retirement, chances are you've been told to look into annuities. Below, we go over the basics of what annuities are and give examples of when an annuity may be right for you.
What Is an Annuity?
An annuity refers to an insurance contract between you and an insurer. You can pay for an annuity with a series of payments or a lump sum. When you purchase an annuity, you will receive income on a regular basis. An annuity is typically purchased to fulfill a specific purpose, such as long-term care costs, lifetime planning, or legacy planning. The payments from an annuity can be deposited into a savings account, pension payments, or monthly home mortgage payments.
The main advantage of an annuity is that it is an investment that can provide you with guaranteed income for the remaining years of your life. As a result, annuities are a popular choice among those planning their retirement. An annuity can offer you a way to save for retirement in a tax-sheltered way. This is particularly beneficial if you've already maxed out your IRA and 401(k). There are no contribution limits for annuities.
Keep in mind that the guarantees of an annuity contract depend on the issuing company's claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contract. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59 ½, a 10 percent federal income tax penalty may apply (unless an exception applies).
How Does an Annuity Work?
When it comes to putting an annuity together, you have several options. You can choose between single or multiple premiums, immediate or deferred payments, and a lifetime or fixed period for payments. If you have a large sum of money saved up, you may be able to afford paying for the annuity with a lump sum (or single premium). However, you also have the option of paying for the annuity over a certain period of time with a series of payments (or multiple premiums).
Next, you need to decide when you want to start receiving the payments. You can decide whether the annuity is immediate or deferred. If the annuity is immediate, you will begin receiving payments immediately. Otherwise, the annuity is deferred, which means you will begin receiving payments in the future.
Finally, you need to decide whether you want to receive payments from the annuity for a lifetime or a fixed period of time. If you choose a lifetime annuity, you will receive a fixed amount of money for the duration of your life. However, if you choose a fixed period annuity, you will receive payments for five to 25 years. You can choose the amount of time for the fixed period annuity.
What Are the Different Kinds of Annuities?
There are primarily two different types of annuities: fixed annuities and variable annuities.
A fixed annuity refers to a savings account that one has with an insurance company. The fixed annuity is comparable to a certificate of deposit.
Variable annuities can be viewed as a mutual fund combined with an annuity. The payments you receive from a variable annuity will depend on the performance of the mutual funds you selected. The money you put into a variable annuity will grow tax deferred. This means that, when you start receiving payments from the variable annuity, you will need to pay income tax on this money.
5 Examples of When an Annuity May Be Right for You
When thinking about retirement, you may be wondering whether you should get an annuity. This section discusses five examples of when an annuity may be right for you.
- You don't want to deal with the stock market. Many retirees don't feel comfortable investing their money in the stock market because of the risks and uncertainties. When you invest money in the stock market, the value of the investment can go up or down. By contrast, an annuity will help preserve the principal value of your investment.
- You want to know exactly how much interest you will make from your investment. An annuity, particularly a fixed annuity, will offer you fixed returns. A variable annuity will provide you with variable returns. However, there is still a guaranteed minimum return.
- You want income that is predictable and guaranteed. If you want income that you can count on for the rest of your life or for a certain period of time, an annuity is a favorable choice.
- You want an alternative to long-term care insurance policies. If long-term care insurance policies are not affordable for you or simply not a good option, you can get an annuity instead.
- You are unable to get life insurance. An annuity can provide many of the same advantages as a life insurance policy. Therefore, if you can't get a life insurance policy, an annuity may be a suitable alternative.
An annuity can be an excellent option for a retiree who wants to sufficiently fund their retirement in a secure and guaranteed manner. For more information about annuities, don't hesitate to contact us.