WHAT TO KNOW ABOUT ANNUITIES BEFORE INVESTING IN THEM

The retirement field is strewn with a myriad of investment opportunities that can make aging worry-free. A steady income stream when one can no longer work is a highly attractive safety net. Annuities can offer this kind of guaranteed payment in your old age. In fact, many insurance providers will claim it’s the type of income stream you cannot outlive.

And while that might be correct in some cases, there are different types of annuities to choose from carefully. Each scheme has its benefits, enabling people to love without worrying about financial security in old age.

How does it work?

A service provided by insurance companies, annuities are among the best forms of retirement plans. The owner, referred to as the annuitant, pays either a sizable one-time premium or makes regular payments over time, depending on the annuity type. This premium paying phase is called the accumulation period.

However, the payments aren’t made indefinitely, unlike other insurance types. You will gradually stop making payments to the insurance company and, instead, start receiving your income from them. This is the payout period.

Annuity payments are flexible, and you can arrange to receive regular income payments monthly, annually, or even quarterly. You can also opt to receive the entire amount at one time. Also, annuities may carry an early withdrawal penalty. So, before you finalize which annuity type to buy, ask your insurance company about all these details.

What happens if one dies before claiming the annuity?

It is essential to check different annuity plans carefully before buying one. That’s because specific plans allow annuitants to make the provision for the payments to be made to their beneficiaries in case they die before the annuity payments begin. Typically, this feature applies when the entire payment period has not yet expired or if some balance amount remains in the annuity account at the time of the annuitant’s death.

Benefits of annuities

The Life Insurance & Annuities Industry in the US has witnessed a 4.2 percent growth in 2021. With a market size of over $886 billion, the industry is expected to grow even faster in the coming years. This growth is witness to the fact that an increasing number of people are giving high importance to annuities and insurance plans as an effective way to manage retirement funds.

Some prominent reasons to invest in annuities are:

  • Long-term security for you and your family.
  • Death benefits for surviving children.
  • Probate-free property distribution.
  • Tax-deferred financial planning.

Different types

There are different types of annuities for you to choose from, each offering a unique set of benefits. Your objectives, risk tolerance, goals, and other factors will determine the type of annuity most suitable for you. Here are the major annuity types to check out.

  • Variable Annuity

Although they are high-risk, variable annuities also offer potentially higher rewards. The interest rate is tied to the investment plan and portfolio. If the plan does well, payments will grow. Conversely, if the portfolio or plan falls, so could the annuity payments.

  • Fixed Annuity

A fixed annuity is the best option for those wanting to take a minimal risk. Such annuities come with a guaranteed interest rate that won’t deflect beyond the contract terms. So, unlike other investment options that might rise or fall, a fixed annuity will remain steady. Nevertheless, the interest rate is reset once a specified period has passed.

  • Indexed Annuity

These have the characteristics of both variable and fixed annuities, providing a great way to balance rewards and risks. In simple terms, it means they carry lesser risks than variable annuity types and more significant reward potential than fixed annuities. 

Conclusion

While the different types of annuities act as sound investment plans, they may not necessarily be for everyone. For instance, if you aren’t worried about your income source running out, have a good amount from Social Security, and possess other retirement assets, then you may not need an annuity.

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