How,Annuities,Work,annuityis,a finance, share, loan How Annuities Work
Date:2021-01-10 How,Annuities,Work,annuityis,a finance
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An annuity
is actually a contract between an individual and an insurance company. Under
the terms of the contract the company that issues the annuity agrees to make a
regular payment to a beneficiary or annuitant. The insurance company is
obligated to make this payment as long as the contract is in force.
To set up
this arrangement a person will have to purchase the annuity from the insurance
company. This can be done in one of two ways: if the plan is purchased in one
lump sum it is called an immediate annuity. An immediate plan starts making
payments to annuitant immediately. If the plan is purchased over a period of
time with a number of different payments it is called a deferred annuity.
Deferred annuities are often used as retirement savings vehicles. There is also
something called a split annuity to which persons can contribute funds while
receiving payments.
Annuities
and Insurance
Even though
they are issued by insurance companies and often come with insurance benefits,
annuities are not insurance. Instead they are an insured investment which means
they are guaranteed by the insurance company. There is even a product called a
life or lifetime annuity which can provide an individual with a regular income
for the rest of his or her life.
Annuities
are insured by both insurance companies and state governments. A policy issued
by a top
rated insurance company
should be a reliable source of income for years to come. Most states also
insure annuities for up to $100,000 and some for up to $500,000.
Many
annuities do come with a life insurance policy as part of the plan. This is an
added benefit and not the primary reason for purchasing such a policy.
Guaranteed
Income and Tax Deferment
The reason
people purchase annuities is an obvious one they provide a guaranteed source of
income. A lot of people purchase these products when they retire because they
provide an additional source of retirement income. Somebody who relies on a
pension and Social Security might buy one to augment those sources of money.
Other persons might buy a plan to provide an income for a disabled relative.
Annuities
are tax deferred which means funds invested in one are not subject to income
tax until they are taken out. Unfortunately the IRS
regards annuities as retirement plans so most people will have to pay a 10% tax
penalty if they withdraw funds from one before age 59½. One reason why many
people purchase annuities is that there is no limit to the amount of tax
deferred money a person can keep in them.
Drawbacks
to Annuities
There are
some drawbacks to annuities that investors should be aware of. Many plans will
charge fees for early withdrawal of funds and maintenance fees. These fees can
be avoided by carefully reading the prospectus that comes with the plan. Unlike
traditional retirement accounts there can be limits on what is taken out
without a penalty.
Another
drawback is inflation many annuities pay out at a flat rate and earn a low
interest rate. That means inflation can quickly undermine the value of a
benefit. To counter inflation investment advisors often advise the purchase of
variable and indexed annuities which are designed to beat inflation. The funds
in these plans are partially invested in stocks or other equities so they
should deliver a higher rate of return. They can be vulnerable to market losses
though. Indexed annuities are based on indexes of stock and can come with a
guaranteed rate of return that can lock in market gains.
How,Annuities,Work,annuityis,a
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