Planning your future it’s no easy task. No one knows what tomorrow could bring, but it’s always best to be prepared. Once a person reaches retirement age, the last thing they should have worry about is their finances.
Luckily, an annuity can help solve that problem. If you’re asking yourself.” What is an annuity?”, this article has the answer. To learn more about how you can secure your financial future, just keep reading.
What Is an Annuity?
An annuity is an agreement between you and an insurance provider in which you make a lump-sum payment or monetary installments to set aside for later. The company will then start to issue disbursements back to you, either immediately or in the future.
The first part of the process is known as the accumulation phase. It’s when an annuity is funded before payouts begin. Once the initial payments stop, the contract moves into the annuitization phase.
Most people get an annuity to help them during retirement. Annuities provide periodic payments that could sustain you for the rest of your life or for the life of a loved one.
It also pays out if you pass away. The person listed as your beneficiary will receive the money in your absence. Furthermore, there no taxes applied to the income and investment gains from the annuity until you take out the money.
How Do Annuity Disbursements Work?
An annuity can be customized to the specific needs of the buyer. You can choose to start receiving your payments immediately, which is known as an immediate annuity. You can also choose the deferred annuity option.
Most people who choose an immediate annuity do it to supplement their retirement income, such as social security. They’ll pay out a lump-sum and disbursements usually start within a month of the initial payment.
On the other hand, a deferred annuity is best for people who are planning for their future. It allows the individual to ensure that they have monetary income once they reach a certain age.
However, for this option, there may be a tax penalty for buyers who withdraw money before the scheduled date or if they are under a certain age.
Also, before getting an annuity, you want to make sure that the insurance company you’re partnering with is financially strong. It’s important that they are still around and in business once it’s time for your annuity to payout.
The Types of Annuities
There isn’t a “one size fits all” annuity. Everyone has different financial needs, so there are multiple annuity options available.
If you can’t decide which annuity is best for you and you have more questions, Pacific Group LA can help. Click the link to learn more about the services they provide.
With that in mind, here are the most common types of annuities:
The variable annuity option allows you to direct your annuity installments into various investments, particularly mutual funds. Your payouts will differ depending on the amount you put in, the rate of the return on your investments, and expenses. The U.S. Securities and Exchange Commission (SEC) regulates this type of annuity.
When it comes to variable annuity rates, several charges and fees are applies. There are administrative charges for record-keeping and other administrative expenses. The insurance provider may also charge a flat fee or the percentage of your account value.
If your account has a guaranteed minimum benefit or long-term care insurance, additional fees could apply as well.
Furthermore, if you withdraw the money before 59 ½ years old, there could be a 10% tax penalty issued by the IRS in addition to any taxes that you owe on the income.
Fixed annuities are controlled by State Insurance commissioners. The insurance company provides a minimum rate of interest and a fixed amount of periodic payments.
It’s a smart idea to check your State Insurance Commission to learn about the pros and cons of a fixed annuity. You should also confirm whether your insurance provider is licensed to sell insurance in your state.
This option includes the features of insurance products and securities. The insurance provider will credit you a return that’s determined by the stock market index.
It’s a bit risky but there is a potential reward with this type of annuity. You will receive a guaranteed minimum disbursement, and the other portion depends on market index performance like the S&P 500.
The Difference Between an Annuity and Life Insurance
Life insurance is a safeguard to ensure that family members can sustain their lifestyle once a loved one dies. It handles the mortality risk in case an individual dies prematurely. Policyholders pay a premium, and the insurance provider in return pays out a lump sum once the individual passes on.
On the contrary, annuities help to deal with longevity risks in case a person outlives their assets. They come in handy as additional income if social security isn’t enough.
An annuity also ensures that the buyer doesn’t have to sell their home or other valuables to supplement their finances after retirement.
Are You Prepared for Retirement?
As you can see from reading the information above, there are pros and cons to getting an annuity. However, it’s not a bad option.
The biggest worry is all about getting to retirement and not having enough money.
So, what is an annuity? Hopefully, this article answers that question for you. If you learned something from this post, take a look at the rest of our blog. We cover a variety of topics about finances, saving money, and more!