Recently I have become aware that there is a large percentage of the population in America that are unsure about what exactly an annuity is. We here at L & A would like to alleviate some of the basic misconceptions people have about annuities.
An annuity is an insurance contract between two parties (you and the insurance company), where the insurance company pays the annuitant (you) regular payments over a certain period of time. This can be over a lifetime or for a set amount of years. The amount of the payments will be based upon how much you have built up in the contract and the payout period you have chosen.
There are 2 different types of annuities and many different products for each type. The first type is a Variable Annuity that offer the possibility of greater return on your money, but also has the risk of reducing in value. The Second type is a Fixed Annuity, these come with a GUARANTEED rate of return. At L & A we only deal with the latter type, because we believe in safety and preservation of principal.
An annuity provides a way to insure your retirement income (or at least a portion of it). Money placed in an annuity enjoys deferred taxes, without the annual contribution limits found with other tax deferred retirement accounts. If you choose a fixed annuity you have a GUARANTEED rate of return and GUARANTEED payments FOR LIFE. They ensure you have income from your nest egg that you simply cannot outlive.
They can have some downside, and they are not for everybody. If you decide to go with a Variable Annuity, you can end up losing money if the insurance companies’ investments don’t do well. Although most allow for up to a 10% penalty withdraw each year, should you need a larger chunk of your money for an emergency you may face penalties. If you do not have sufficient reserves to pay for your day to day living expenses, an annuity may be deemed ‘unsuitable’. In the case, an insurance company may choose not to issue the contract. Also, it’s best to look for annuities with no fees.
Annuities can be excellent addition to fund your retirement in tandem with Social Security and any other pension program you may have available to you. Finding the right product all depends on your specific situation. If you are interested you may want to consider talking to an expert and see what would work for you.
Ben Rosky, RHU