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Why Buy Annuities?

An annuity is a financial product that is used for a safe and secure investments with a reasonable rate of return. Annuities can be used for several types of investment goals. Income growth, Income stream, legacy or beneficiary planning, Avoiding probate, Exemption from court proceedings and much more. Annuities are created and sold by financial institutions, which accept and invest funds from individuals. If the owner decides to turn on income or annuitization, the holding institution will issue a stream of payments at a later point in time. If the investor however wishes to invest for the entire contract period normally 3-5-7 or 10 years the investor can have all funds transferred into any financial institution they wish and walk away with their entire balance secure.

Key Features

  • Annuities are financial products that offer a guaranteed income stream, used primarily by retirees
  • Annuities exist first in an accumulation phase, whereby investors fund the product with either a lump-sum or periodic payments. Investors then can grow their investment with a reasonable rate of return or convert the annuity into an income stream
  • If the annuitization is turned on, the product begins paying out to the annuitant for either a fixed period or for the annuitant's reamining lifetime
  • Annuities can be structured into different kinds of instruments - fixed, fixedindes, variable or immediate to give investors flexibility

Who Buys Annuities?

Annuities are appropriate financial products for individuals seeking stable, guaranteed retirement income. Because the lump sum put into the annuity is illiquid and subject to withdrawal penalties, it is not recommended for younger individuals or for those with liquidity needs to use this financial product.Annuity holders cannot outlive their income stream, which hedges logevity risk. So long as the purchaser understands that they are trading a liquid lump sum for a guaranteed series of cash flows, the product is appropriate. Some purchasers hope to cash out an annuity in the future at a profit. This would be achieved with a fixed or Fixed indexed annuity otherwise refered to as a hybrid annuity. These annuities are designed to povide a fair rate of return while guarding your investment from any downturn in common investment platforms such as the stock market. Also there are no brokerage or load fees to the investor. Immediate annuities are often purchased by people of any age who have received a large lump sum of money and who prefer to exchange it for a cash flow into the future. The lottery winner's curse is the fact that many lottery winners who take the lump sum windfall often spend all of that money in a relatively short period.

Types of Annuities

Annuities come in three main varieties: fixed, fixed index and variable. Variable annuities come with risk and fees but the payout potential can sometimes be greater. Fixed annuities pay out a guaranteed amount. The downside of this predictability is a relatively modest annual return, generally about double the return from a bank CD.

Fixed Annuity

A fixed annuity is a contract with a life insurance company that provides income to those in retirement. The product allows the policyholder to deposit a lump sum which will grow to provide tax-deferred income later. The insurance company guarantees the rate of interest--fixed interest--you will earn on money deposited in the annuity contract. There are two main types of fixed annuities: deferred and immediate. A fixed annuity is most comparable to a certificate of deposit (CD) issued by a bank or other financial instittution. Except with a fixed annuity, the interest you earn accrues inside the annuity and is not taxable until you withdraw it from the annuity fund. With a CD the bank sends you a 1099-INT tax form each year which reports the amount of interest you earned. You must report this interest on your tax return even if you let it accrue in the CD. Like a CD, a fixed annuity pays a guaranteed return. Somethimes the return is front-loaded, so there may be a higher interest rate in year one, and a lower rate in years two through three, five, seven, or ten whatever your term is agreed to. Like a CD, there is a term assigned, such as a five-year fixed annuity. Some fixed annuities have their terms as long as fifteen years. If you surrentder the annuity before the term is up, you will pay a surrender charge. Different insurance providers will offer products with different interest structures. You need to calculate the yield the product provides if helf for the full term of the contract to accurately compare one offering to another. If you have a long time-frame and want a no-risk investment, you will want to make sure there are penalty free withdrawals. Most annuities offer a 10% penalty free withdraw per year. This might be a good choice for funds you inherit or a bonus you receive.

Deferred Fixed Annuity

With a deferred fixed annuity - often called deferred income annuities (DiAs) - you receive a guaranteed amount of interest which accumulates inside of the annuity contract. The inbterest is tax-deferred, so no income taxes are paid until you take a withdrawal. You can buy a deferred fixed annuity with IRA money, in which case the tax rules that apply to IRAs will apply to all funds in the annuity. These tax rules include contribution limits, the type of investment held and the required minimum distributions (RMDs). You can can also buy a deferered annuity with non-qualified money (non-IRA funds).

Variable Annuity

Variable annuities provide an opportunity for a potentially higher return accompanied by great risk. In this case, you pick from a menu of mutual funds that go into your personal "sub-account." Here, your payments in retirement are based on the performance of investments in your sub-account.

Fixed Indexed Annuity

Otherwise known as a Hybrid

You receive a guaranteed minimum payout, although a portion of your return is tied to the performance of a market index, such as the S&P 500. Variable annuities are often criticized for their complexity and high fees compared with fixed indexed annuities that generally have no fees. Fixed indexed annuities will outperform a variable in down market cycles and when you subtract fees from a variable annuity, the returns are sometimes as good with a fixed indexed annuity that has no fees. Fixed indexed annuities have evolved and have many features within the platform such as home healthcare or assisted living care, terminal illness wavers, penalty free withdrawals and more. Fixed indexed annuities are among the very safest investment you can make.



Rule No. 1: You Can Never Lose Money on Annuities

Rule No. 2: Never Forget Rule #1