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Susan Kelly

Dec 06, 2021

What is an Annuity?


Annuities are also known as insurance contracts. Annuities provide a fixed amount of income for a specific period or through life. You can purchase annuities upon a lump sum or payment done in series. It begins paying out as per your choice, be it in the future or immediately. People commonly use annuities as a source of funding retirement. If you have a long-term plan for growth or income in mind, opting for annuities is a good idea! However, keep in mind that they are not for short-term investment techniques. Annuities are appealing to people who are looking ahead to a secure future. It may interest you if you are searching for long-term financial security, income after retirement, principal preservation, or diversification. An annuity is an insurance product that aims at providing its customers with a guaranteed income for a stable life. An annuity is a legal and written agreement made between the insurance company issuing the contract and you. If you outlive your savings, this contract will transfer your longevity rate to the insurance company. In exchange for this favor, you pay premiums as mentioned in the contract.


Points to be noted:


1. An annuity is a contract issued by the insurance company that takes premiums later converted into fixed guaranteed income flow.


2. The future annuity payment you receive is determined by the type of annuity you purchase at the start.


3. The benefits of buying an annuity are numerous. They include principal protection, the hope of getting a lifetime income. You also get an option to leave money to the beneficiaries.


4. Specific annuities are meant to pay for long-term care.


How do Annuities Work?


For annuities to work, you have to pay lump-sum premium overtime for it to convert into a flow of income that cannot be outlived. People who retire look for more than social security and saving to fulfill their daily needs. Annuities are created and designed to generate income through a systemized process. This process works through accumulation and annuitization. In rear cases of emergency, immediate annuities can begin over a month from purchase. (No accumulation phase). Taking a close look, when you will buy a deferred annuity, you will pay a premium to your insurance company. The starting investment will keep growing and flourishing tax-deferred in the phase of accumulation within a time frame of ten to thirty years (depends on contract). After the accumulation phase ends, the annuitization or distributions phase starts. You will start getting paid according to the contract from the insurance company. The foremost benefit of purchasing an annuity is that you get relief from all the ups and downs the market has to go through. To get rid of this risk, the insurance company takes fees for contract riders, investment management, and other services of administration. You as an annuity owner are free from longevity and market risk. Most annuity contracts have a period of surrendering in which you cannot withdraw money without incurring a charge for surrendering.


Annuities In-depth explanation:


1. Free-Look Period:


This period provides the consumer with the chance to cancel the contract without a surrender charge.


2. Riders:


Riders are addition or removal made from a contract. It customizes the basic annuity contract. It is necessary to be aware of the additional cost before selecting.


3. Beneficiaries:


You can opt for adding a death benefit to the contract to secure a portion of the contract value by your beneficiary.


4. Fees/Commissions:


The fees and commission depending on the type of annuity you choose. Usually, fixed annuities have the lowest fees.


5. Taxation:


If you have bought the annuity with money then consider your tax as paid. Now your earnings will be taxed upon withdrawing.


Cash your annuity now or later?


There are two basic configurations of annuities:


1. Immediate


2. Deferred


If you want to get paid immediately you can opt for an immediate annuity. On the other hand, if you want your payments to initiate later in the future you can purchase a deferred annuity and mark the date of withdrawing.


Types of Annuities:


The different types of annuities can exist to fit your diverse nature of needs. Your objectives and expectations determine the annuity type that fits you best.


1. Fixed annuity: (Guaranteed Income)


· Earns a marked rate of interest over a set period/ Backed by the company.


2. Fixed Indexed Annuity: (Growth potential)


· Earns interest through a market index/indirect participation in stock market/ minimum rate of return


3. Variable annuity: (Flexible Income)


· Earns its interest through the investment selected by you in annuity/ more growth potential/ no guarantee of return.


Conclusion


Annuities are insurance contracts that offer premiums and in return offer income. This income can either be withdrawn immediately or at a specific point in the future. Annuities help in securing the future. Some of the major benefits you can gain from annuities are:


a. Long-term safe and secure income

b. Tax-deferred growth

c. Adjusted through inflation

d. Protection

e. Death benefits


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