You may not reach retirement age without anyone asking about an annuity. They want to know if you are considering buying it, and if they work for an insurance agent, tend mind to try to sell a lifetime advantage that an annuity can provide.
So, what exactly is the annuity? An annuity is an insurance policy that behaves like an investment.
Annuities offer a hedge against something bad that happens to your money, like big losses in a collapsed stock market. Instead of managing you're a number of personal and assuming the inherent risks to stocks and mutual funds, you buy an annuity that guarantees a stable monthly income for decades or even a lifetime.
An annuity is a contract between an investor and an insurance company designed to meet long-term pension goals for investors. Money can be invested simultaneously or through a series of payments. In return for the investment, the insurer agrees to make periodic payments to investors beginning on a specified date.
Just like a life insurance policy, which guarantees paralysis for your heirs, an annuity is a contract with an insurance company that pays you, slowly in most cases, while you are alive, and often gives payments to the beneficiaries. when you die An annuity comes with a huge initial cost. Many buyers put most of their retirement savings into annuities, giving them the comfort that whatever happens, they will always have an income. In addition, the amount you invest grows the deferred tax until it is withdrawn.
Type of Annuities
Retirement annuities properly termed suspended annuities, come in three varieties, fixed, indexed and variable. All taxes are deferred and will pay your beneficiaries the minimum amount specified when you die. Periodic payments are made to you for a certain period of time or a lifetime, and payments may continue after your death to your spouse.
Some Variations of Annuities:
� Annuity fixed.
Returns are based on the fixed interest rate you agree to when you purchase an annuity. The insurance company will also make a regular payment of a certain amount of every dollar you invest.
� Annuities are indexed.
This underlies your payment on the performance of a financial index such as the S & P 500 provided that you will never receive less than the minimum monthly payment amount. If the index performs very strongly, your rate of return can be greater than the investment, but if it is weak, you will never receive less than the specified amount.
� Annuity Variable
It uses investments such as mutual funds to determine your return. The rate of return on your investment and the amount of periodic payments you receive depends on the performance of the funds you choose. Variable annuities usually give death benefits to someone you point to. The person can receive all the money left in the account or the agreed minimum.
Annuities come with two payment plans. The annuity immediately starts paying as soon as you buy it. This product is often sold to retirees who want to turn savings into a guaranteed revenue stream. Other varieties are deferred income. This model allows you to buy an annuity now to receive future payments. If you are in your 50s and do not envisage the annuity income needed until the age of 70 years, this model lets you build a value before payment begins.
You should also remember that unlike savings in government-regulated banks, annuities are insurance products that are not insured. If you are unsure of the condition of the company that issued the annuity, you may have to rethink to make an investment because the failure of the company can consume your retirement savings.
History of Annuity
The concept of annuities originated in ancient Rome, but the first record of annuities in America dates back to the Colonial period. In 1759, a company was set up to provide a safe retirement period for an elderly Presbyterian minister and their family. In 1812, the Pennsylvania Company for Insurance for Life and Annuities Award received a charter to sell annuities to the public.
The current annuity era began in 1952 when the educational retirement educator, TIAA-CREF, firstly offered a variable annuity of suspended groups. Current annuities are widely used to provide individual pensions, usually on a tax-delay basis. The US buys more than $ 117 billion annuities by 2016, according to the LIMRA Secure Retirement Institute, and the country has nearly $ 2.3 trillion worth of policies.
Structured Settlements and Annuities
Structured settlements are associated with annuities because they are considered an effective way to give money to people who need them but also require monthly or annual payment discipline. The Congress in 1982 passed the Periodic Payment Settlement Tax Act, which established structured settlements to provide long-term financial security to victims of accidents and their families.
The idea is to reimburse lump-sum payments granted to personal injury claimants with regular payments. The aim of the government is to reduce the number of recipients of personal injury awards that through their funds too quickly and then be forced to rely on public assistance. In addition to personal injury claims, structured settlements are often reserved for those who win major liability and damage assessments, for lottery winners and lawyers and law firms that have a lot of fees.
Because annuities can be designed to offer timed payments, principal guarantees, as well as investment benefits, and already offered by insurance companies, they are quickly becoming the vehicle of choice for implementing structured settlements. To encourage its use, the new law makes any interest or capital gains derived from annuities in a tax-exempt settlement structured.
Pros and Cons of Annuities
The main reason for having an annuity is security. In addition to ensuring a steady stream of income during a person's retirement, many annuities are guaranteed at a minimum rate of return, which means that the principal cannot be protected from loss; their earnings can also. In some cases, by annuitize the contract, the annuity owner may even receive a lifetime income stream, far more than the initial investment.
Annuities also offer predictability. Fixed annuities - associated with an unshakable interest rate - are very attractive to investors who want to know how much money they will earn for years, or even decades into the future. They generally offer higher rates of money market accounts or certificates of deposit (CD) and are equipped with similar protection and guarantees.
In contrast, variable annuities - associated with rates of increase and decrease - offer the same returns as those achieved through stocks or mutual funds, but with greater flexibility, more loss protection, and certain tax advantages.
Other things to consider: Annuities come at a cost, often high. Brokers who sell annuities usually receive a commission, and companies that manage annuities charge an annual maintenance fee. If an annuity is invested in a mutual fund, then the cost of funds becomes part of the cost.
Because the annuity is an insurance product, their structure reflects the risks assumed by the insurance company. For example, the value of variable annuities invested in mutual funds varies with the value of funds, which may go down. If an annuity guarantees a minimum periodic payment, the annuity fee will reflect the risk imposed by the insurer, and that risk is the premium paid to the annuity charge. Some annuities also lock in your profits after a certain take, which also adds to the risks posed by the issuer. Again, that risk means the additional cost that is in the annuity.
The biggest cash for an annuity is that you must be 59 and a half years old by withdrawing the benefit of the annuity and not having to take a 10% early withdrawal penalty. There will also be a handover fee if you try to withdraw early. The cost goes away from time to time, but if you need money now, you will pay a fine.
Another negative thing to have an annuity is that many of them charge higher annual fees, especially on variable annuities than those charged on managed funds or stocks. Also, the current interest rate is so low that inflation can easily rise faster than the interest rate you will receive an annuity.
There are negative tax implications associated with annuities. Profits on annuities are taxed as ordinary income, meaning you can pay twice as much tax as you earn from capital gains on stock or mutual fund investments. Another tax penalty comes when you give annuity allowance to the person you love after your death. They have to pay taxes as ordinary income.
Questions You Should Ask
If you are considering an annuity to cover pension costs, ask yourself the question. Remember there are other ways to pay for pensions, including withdrawals from standalone retirement accounts and 401 (k) plans. You should consider alternatives and get solid advice, perhaps from a certified financial planner.
If you are leaning towards an annuity, consider:
� Are you willing to accept the risk that your value may go down if you invest in a variable annuity?
� Do you understand all the costs and costs associated with the annuity?
� Are you planning to keep variable annuities long enough to avoid submission costs if you decide you want to move your money?
� Are there elements of variable annuities, such as long-term care insurance, that might be bought at a cheaper cost elsewhere?
� Have you talked to a tax or financial advisor about the tax consequences of an annuity?
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