About Annuities

What is an annuity?

Annuity insurance is an investment vehicle, which allows the investor to save money, tax deferred for retirement.  Annuities receive tax deferral benefits like a 401k or IRA, but have no maximum investment amount.  Investors can purchase an annuity with a one-time payment, or multiple payments.  They can also purchase multiple annuities.  Annuities come in three general types and two payment schedules (which we’ll discuss below).

Is an annuity right for me?

Annuities can be a great part of an investment strategy preparing for (or during) retirement.  However they are not right for everyone.  Annuities do allow for tax deferred growth, however investors are not allowed to withdraw funds until the age of 59 and a half years old.  Withdrawals before this age will be penalized both by the IRS, and usually the insurer, so before investing ensure that you have proper liquidity.

Annuities can provide security for your spouse or children (like life insurance), and a steady income for retirement.  There are many reasons why people invest in annuities other than just the tax benefits, and differences between annuities and annuity companies can be large.  Ensure that you know exactly what you’re getting with your annuity.

What are my annuity options?

There are three general types of annuities and two payment options.  Of course, within each type, each annuity comes with its own unique benefits, length and options for the investor.  Let’s explore each type.

Immediate and Deferred Annuities

These terms refer to when the investor gets paid on the investment.  As you can guess, with an immediate annuity the investor starts receiving payments right away, and with a deferred annuity, payments are delayed for sometime before they start.  Once payments start they are usually set for a regular schedule, and they can be for a set amount, or varying amount.  To have the option to start receiving payments immediately, you must be at least 59 and one half years of age, withdrawals before that age will come with penalties (as annuities are for the long term, and for retirement).  Therefore, anyone under 60 has a deferred annuity, where the annuity is invested, and the investor is receiving tax deferred interest, but does not actually receive any payment.  People older than sixty can have an immediate or deferred annuity, it’s their choice.  Usually people defer annuities until they retire.

Fixed/ “Term Certain” Annuities

Fixed Annuities are very similar to bank-issued CD’s, but geared specifically for retirement savings.  A lump sum upfront provides guaranteed ongoing payment for life, or for a fixed period of time, usually 1-10 years.

Fixed annuities can usually be purchased for as low as $5,000; they are very low risk, have more liquidity than CDs, are tax deferred and usually offer higher returns than bonds, CDs, treasuries, or other low risk investments.

The type of annuity that’s right for you depends on many factors, including your propensity for risk and your personal retirement and family goals.

Variable Annuities

Variable annuities allow the investor to invest in all the things they normally would, stocks, bonds, mutual funds, and more, but with the tax shelter of an annuity.  Variable annuities can be as risky or as safe as you want them to be –  it depends on what you want to invest in.  When the investor receives payments, the amount they receive will go up and down depending on the return on their investments.  Variable annuities are often used by those that are still working and looking to build wealth for retirement, versus those already retired and looking to protect their nest egg.  If you have already used your 401k’s and have no immediate need for funds, a variable annuity can be a smart choice.

Fixed Annuities

This is the most common type of annuity, and it contains the safety and protection most people perceive an annuity to come with.  We also have a full range of fixed annuity quotes (do not be fooled by our site name).  Fixed annuities provide the investor with a fixed rate of return, for a period of time, or for life.  They can be like other safe investments such as low risk bonds, or bank CDs.  During the recession fixed annuities have become quite an attractive investment for many investors, as the rates of return offered have not decreased as much as other low risk investments.

Equity Indexed Annuities
A hybrid of variable and fixed, they place all or a part of your annuity into a stock index (not individual stocks).  That index is usually the S and P 500.  Equity indexed annuities usually come with a fixed option, allowing investors the option of switching over to a fixed annuity at anytime if they feel the market is going to take a downturn.  This type of annuity allows investors the opportunity to earn a higher interest rate, with a safe option.  Equity indexed annuities are considered relatively safe compared to variable annuities.  Unlike variable, assuming the index will never disappear and hit zero, you cannot lose your entire investment. are higher risk and offer the potential for a higher return than fixed annuities.  Variable annuities combine some of the features of the stock market with the tax protection and lifetime income offered by annuities.  They allow you to invest in a variety of portfolios, similar to mutual funds and can include stocks, bonds, and other types of securities.  You have the options to choose what to invest in and how to allocate your money.

They offer the same tax advantages as fixed annuities – gains are not taxed until you make a withdrawal.  Unlike fixed annuities, the amount of each paycheck you receive will vary and is not guaranteed.

Equity-Indexed Annuity

Equity-Indexed Annuities are a hybrid of fixed and variable annuities.  Linked to common stock market indices, it offers more risk and reward than a fixed annuity.  If the index grows, so does your payout.  However, if offers more safety than a straightforward variable annuity.  If the index declines, you’re protected against losses with a modest baseline rate.

In between the risk of fixed and variable annuities, they allow you to invest in the market without risking your principle.

To talk to a licensed advisor, see our “Get a Free Quote” page, and a trusted advisor will give you a free, no obligation call to answer your questions, discuss your options, and recommend a solution that may be right for you.

This entry was posted on Wednesday, February 24th, 2010 at 7:05 pm and is filed under annuities. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

One Response to “About Annuities”

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