Annuities Explained – Getting to the Bottom of It All
Annuities Explained – When Retirement Comes
Ever thought about retirement? For younger people, particularly those younger than 40 years old, the thought of retirement is often not at the top of their minds, with good reason, since they still have many more years ahead of them to fret about retirement. However, for those nearing retirement age, thinking about your retirement funds can become overwhelming. For one, where will you get your money, once you stop working? Will your retirement fund be enough to cover your living expenses, aside from the possible medical expenses? These are just some of the many concerns that pre-retirees have when it comes to retirement. Fortunately, you have annuity to help you get through your retirement without many problems.
So now, what are annuities? Are annuities good or bad? Will your retirement be better with or without it? To help you out, here is annuities explained in simple terms. According to the annuities Wiki, it is an insurance product that requires the annuitant to pay a specified amount of premiums at regular intervals to an insurance company and in exchange, the company will provide income at specified intervals. To put annuities definition simply, it is a financial product provided by an insurance company that provides steady income to the insured, in exchange for paying premiums.
In comparison to most bank savings accounts, annuities are often considered to be the better alternative for both retirees and non-retirees. Annuities offer greater benefits in terms of flexible premium payment options, no contribution limits, higher interest returns, tax advantages, and a fixed periodic income.
Annuities Explained – How Do Annuities Work?
With the annuities explained definition done, how exactly do annuities work? An annuity is generally divided into two phases, the accumulation and the distribution phases. As the name implies, the accumulation phase is the point when the annuitant deposits the premiums, either in lump sum or a stream of payments, while the distribution phase refers to the time when the company pays periodic income to the annuitant. The distribution phase normally wouldn’t start until the insured reaches 59.5 years old. However, the insured can choose to get the income prior to the start of the distribution phase, but that would incur surrender charges.
In many instances, annuities are seen as the opposite of life insurances, since life insurances often provide financial protection to the beneficiaries of the insured, whereas annuities provide financial protection to the insured. The interest earnings that grow in an annuity account are tax deferred. However, since they’re only deferred, the insured would have to pay taxes on the earnings once he chooses to withdraw them, even during the distribution phase.
Annuities Explained – Taking A Closer Look
It is a fact that people have distinct financial needs and situations, which means that having only one type of annuity for everyone is unworkable. As a result, there are hundreds of annuity types being provided by different financial institutions. However, all of these types fall into two basic types, the fixed annuity and the variable annuity. In some sources, you can also find the fixed indexed annuity as another basic type. Let’s us look into these three types more closely.
Fixed Annuities Explained
The fixed annuity is a type of annuity wherein the insurance company provides a fixed income, which is made known to the annuitant, on an annual basis. The amount of the income is guaranteed by the company and will never decline. Every year, the interest earnings will be added to your original investment. The longer your fixed annuity term is, the higher your interest rates will be.
Take note that the interest earnings are tax deferred, which means that until you decide to take your income, your interest earnings will not be taxable. Fixed annuity contracts allow the insured to withdraw up to 10% of their income every year, more if the contract allows it. Withdrawing more than 10% would incur surrender charges, which are often significantly high, to protect the insurance company. Companies normally offer an initial one-year rate that would change every year. Multi-guarantee annuities are also offered that have a fixed rate for the entire duration of the contract. In many instances, fixed annuities are comparable to a bank CD or certificate of deposit.
Variable Annuities Explained
With variable annuity, instead of earning from income provided by the insurance company, you instead earn from mutual fund investments. The company will provide you with a list of sub-accounts that you can choose to invest your money in. Depending on the performance of the sub-accounts you have chosen, you can either make a significant amount of money or you can lose a lot of money.
For many investors, investing all your money on variable annuity is a bad idea. However, having some variable annuity investments in your portfolio is always a good idea, since it can provide you the higher yield you need, which you can’t get from any other kind of annuity.
Indexed Annuities Explained
Indexed annuity, also called fixed indexed annuity, is a hybrid annuity that combines most of the benefits of the fixed and the variable annuities, with as few of the problems as possible. When you invest in an indexed annuity, the company basically invests your money in conservative funds. The income that generated from those investments will then be invested in the stock market. If the market performs splendidly, you can earn a lot of money, but if it does not, your original investment will not be affected at all.
Without the right guide, like Wiki and other related sites, understanding annuities, its definition, function, and types, as well as the right one for you can be very difficult. One particular resource that you can use to your advantage is the Annuities for Dummies book. This dummies book contains many of the author’s personal experiences with the subject, as well as useful annuity tips. The use of an annuity calculator is also a good idea if you want to compute for something.
Naturally the best way would be to hire an annuity expert, one that could give you explained advice. Not only will you understand annuities in general, but you can straighten out your finances. Those things you must do when you want to have annuities explained to you in depth.