subject: Understanding What An Annuity Is And How It Works [print this page] If you are interested in investing for your future, a good place to start is to learn exactly what annuities are. You may find that these are exactly the kind of investments that will get you where you want to be financially.
An annuity is a type of insurance product that allows you to receive periodic payments for a certain
amount of time based on the amount of money you've invested. Your monthly annuity distributions are based on the amount of money you have invested in the annuity, and the length of your payment period.
Annuities can come in a few different varieties, including fixed and variable. With a fixed annuity, you receive a fixed monthly payment.
Your insurance company chooses your annuity investments, and promises you a fixed-interest rate at which your investment can grow. On the other hand, your payments will vary with a variable, based on the underlying investments.
The rate of return will vary based on the investments you have chosen. Your annuity's value will depend on how your investments perform.
The investment choices provided in variable annuities allow you to invest in sub accounts, which are similar to mutual fund accounts. You can also choose between deferred, or immediate.
You can decide whether you want to start receiving your payments immediately, or you can wait a few years to receive payments by choosing a deference. You might choose an immediate if you are in retirement, and you want to start receiving your payments sooner rather than later.
On other hand, if you're not ready for retirement or you want to give your investment a chance to grow for a few years, you might choose the other route. The money you contribute has already been taxed, so you won't pay any additional taxes on your contributions once you start receiving payments.
Your earnings are tax-deferred and will be taxed when your payments begin. Gains are taxed as regular income, while annuitization is treated favorably, as it's considered a return of premium.
There is no annual contribution limit, so you can invest as much cash as you can afford and immediately defer it from tax. Unlike 401(k)s and IRAs, there are no tax breaks for contributing money, though there are less restrictions.
You may find fees associated with your investments. This is especially true when it comes to variable annuities.
Common fees include administrative fees, mortality and expense risk charges, underlying sub account expenses, and charges for other features like special riders. You can compare multiple product fees by reading each prospectus carefully.
If you decide to take money out within the first few years of opening it, you may be subject to surrender charges. These often start at out around 7% and decrease each year until it zeroes out. This allows the advisor to get paid without charging an upfront commission.
There are variable products available that are liquid, in that they have no surrender charges. These often come with higher operating expenses.
Though these products come with higher costs they do have some advantages. Check with your advisor to see if they are right for your unique situation.
All products do have withdrawal restrictions. You will be charged a 10% early withdrawal fee if you take money out of an annuity before you reach age 59 1/2, so plan accordingly.
You can choose several options for how you receive your payments. You can opt for lifetime payments where you receive fixed or variable payments during your lifetime.
Your payments are based on your total investment and your life expectancy. With lifetime payments, you won't have any survivor benefit, so your heirs won't receive anything at your time of death.
The advantage to this is that you will receive maximum income that can never be outlived. With a period certain annuity, you receive guaranteed payments over a certain period of time.
You get to name a beneficiary who will continue receiving the benefits from your investment if you pass away before the guaranteed period ends. This kind of investment allows you to receive guaranteed benefits for a certain period of time and will continue to pay your beneficiary if you pass away within a certain period of time called the certain phase.
If this sounds like something that would benefit you and your family, talk to someone today about this interesting type of investment. You never know how much you could alter your financial circumstances from this one small change to your overall plan.
