ANNUITIES
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What is an Annuity?
Annuity literally means "annual payments," and is a contract between you and an insurance company. You give the insurance company money one time, or over a period of years, and the company, in turn, promises to make regular payments to you over your lifetime, or for a certain period you specify.
Two types of annuities are available: immediate and deferred.
An immediate annuity will start making secure, guaranteed payments to you right away (usually within the first year of paying your premium). If you are still saving money for retirement, however, a deferred annuity is probably a better option for you. Deferred annuities enable you to grow your money through tax-deferred interest accumulation over a period of time before they begin paying you. After the accumulation period (usually 1, 5, or 10 years), the insurance company will begin making payments to you based on the income option you selected.
And tax-deferred annuities offer important benefits not found in in other tax-qualified accounts (such as IRAs and 401(k) plans): first, there is no limit to the amount of money you may contribute to an annuity; and second, annuities guarantee that upon the death of the investor, his or her beneficiary will receive either the annuity's market value or at least the amount of the original investment.
Should You Buy an Annuity?
The answer depends on your individual circumstances. Do you have money to invest as a result of an inheritance, a pension plan or the sale of a home or business? Do you have a bank CD or money market account that is no longer generating competitive yields? Do you have more money available now that your children are grown? If any of these situations apply to you, a tax-deferred annuity can be a smart way to turn your money into a steady stream of retirement income you can count on for as long as you live.
Many people today use annuities as part of their overall
financial plan instead of savings accounts and certificates of deposit because their tax-deferred money can grow and compound faster over a shorter period of time. "Tax-deferred" means that the earnings are not taxed until distributed either in a withdrawal or in annuity payments. Even then, the amount you contribute to the policy is not taxable.
See also our Annuity Glossary.
Click for a Free Annuity Quote.
