Some annuities can guarantee you a steady stream of income for your entire life—even if you outlive your investment. Surprisingly, it’s really easy to apply for.
Annuities are a great and safe way to invest your money and still see good returns over the long haul. The world of annuity purchasing, however, is full of questions and pitfalls. Some annuity paperwork is so complex that you cannot even understand what some of the benefits of owning that particular annuity are. But annuities are an investment type that will continue to increase in popularity, especially now that the Baby Boomer generation is nearing their retirement years. By arming yourself of the knowledge of how a specific annuity will work for you, you will be taking an important step in planning your retirement years.
What is an annuity?
An annuity is a life insurance product. Rather than providing beneficiaries with a payout upon the owner’s passing away, annuities (in most cases) provide benefits to the owner while they live. Many people have used the phrase “old age insurance” to describe how an annuity works.
How do annuities work?
Annuities work because of the law of large numbers. In simple terms, what this means is that life insurance companies pool all of their clients’ annuity investments together and then base payouts upon the life expectancy amongst the policy holders. So when you start receiving payouts, you are actually getting money from a larger pool than just what you put into the policy. After you select what type of payment you will receive, the money that was entrusted to the life insurance company will start coming in one month at a time.
What are the benefits of annuity ownership?
There are many! But perhaps the biggest benefit is that your money grows tax-deferred. This means that your principal amount is gaining interest, your interest is gaining interest, and the amount that would usually be removed for taxation is also gaining interest. This will help your money grow at a much faster rate than a taxable investment would.
How do I fund an annuity?
There are two main ways to fund an annuity. You can put one lump sum into the policy or you can break it up into several contributions over a longer period of time. Different life insurance companies will have different regulations when it comes to funding your annuity, but each type falls into one of these main categories.
What are the different types of annuities?
There are three types of annuities, fixed, variable and equity indexed.
A fixed annuity gives you a steady but small return year after year. You will receive the stated amount of interest regardless of what the over market conditions are.
A variable annuity will fluctuate up and down in the returns your policy receives based upon whichever assets you chose to include within it. This is very much like how a mutual fund works.
An equity indexed annuity strikes a balance between these two main types of annuities. These are connected to a broader index, such as the S&P 500.
Which annuity will work best for me?
Determining this will largely be based upon your financial needs. People in their retirement years will want usually want something with a guaranteed return while younger folks will want something that can keep up with inflation. Determining where you are in your life and what your financial needs are will dictate which type of annuity is best for you. If you are unsure, you can always contact an annuity specialist.
If you are still wondering about annuities, take some time to do your research. There are many variations of the classic annuity out in the market and almost as many different companies vying for your business. Don’t feel pressured or rush to a decision. Choosing an annuity is an important life decision—you want to make sure that you make the right one.
Before you select an annuity as yourself the following question: what do I hope to get out of this? The answer to this simple question will ultimately give you an idea of what you need in your annuity. After that, it’s just a matter of finding a company that has the product that matches your needs. There are many insurance companies out there, make them work for you rather than the other way around.