Annuities have been around for a very long time, but many people have no idea how annuities work. Very simply, an annuity is a contract between you (the annuitant) and an insurance company to provide you with a future income stream. You give an insurance company an amount of money, and in return, the insurance company promises you regular checks for as long as the contract stipulates.
The annuitant has a wide variety of choices of how to structure the annuity. Payout can be for a certain period of years; begin immediately or sometime in the future or can be paid for your lifetime. Age, sex, duration of payments and the amount of payments are determining factors in the initial or ongoing premium.
But, are annuities for you? There are several reasons why you should seriously consider annuities in your financial or retirement planning:
Income you cannot outlive. Annuities can provide you income which by contract, you cannot outlive.
Guaranteed returns. Annuity contracts guarantee a minimum rate of interest. The amount you get from your annuity will never be less than what you put into the annuity – a guarantee you can’t get in the stock market.
Tax-deferred interest. Interest earned on a deferred annuity is not taxable until taken out of the annuity.
Proceeds at death pass outside of probate. While annuities are estate assets, the proceeds pass directly to the beneficiary named in the contract avoiding the probate process.
In order to provide the income guarantees and death benefits, the variable annuity provider will assess income withdrawal, mortality, expense and administration fees. These fees are in addition to the sub-account fees that would have similar fee structures to that of mutual funds.
Surrender charges are assessed if you close the annuity within a specific period of time, called the surrender period. Surrender periods can vary widely, but some are as long as eight years.
While annuities aren’t for everybody, they do provide a safe-haven for money with guarantees that you cannot find anywhere else. The long and successful history of annuities is one of the greatest arguments in favor of this investment.