Information about Annuities
An annuity is basically an agreement for an organization (or person) to give another person (or organization) a series of payments. Typically, the term "annuity" is for the agreement to be between you and an insurance company, but it can also be an agreement between you and a trust or a charity. There are several types of annuities, and they are classified by their purpose:
- Premium payment contract - single or flexible premium
- Tax Status - qualified or nonqualified
- The type of investment - fixed or variable
- Payout agreement - fixed amount, fixed period, or for the life of the person
- Purpose of the annuity - to accumulate or pay out (deferred or immediate)
Main Benefits of an Annuity
- Lifetime Income
Getting an immediate lifetime annuity will convert an investment into a continuous series of payments that will come to you as long as you live. These payments come from 3 sources: Your investment, interest on your investment that the insurance company makes, and investments and interest from investments from other people who did not live as long at it needed for them to get their money back. This "pooling" is what allows the insurance companies to guarantee you a lifetime income.
- Tax Free transfers among investments
As opposed to mutual funds and other investments made with after tax money, annuities don't offer any penalties if you change how your funds are invested. So if you want to "rebalance" your investments every so often to get them back to the proportions you want, you are able to keep your appropriate risk management strategy.
- Tax deferred investment earnings
Typical investments are taxed year to year. But with annuities, 401(k)'s, and IRA's, the investment earnings, capital gains and investment income don't become taxable until you withdraw the money. A 401(k) and IRA have limits on the amount of money you can put into them, where an annuity does not. And the minimum withdrawal requirements aren't as strict as they are with a 401(k) or IRA.
- Protection from creditors
The money put into an annuity is money that belongs to the insurance company, so if you own an immediate annuity the most that creditors can access is the payments as they are made (or when they become yours). Some states and recent court precedents also protect some or even all of the payments from those immediate annuities.
- Guaranteed Period protects your risk
If you buy the added "guaranteed period" option on an annuity, it will safeguard your risk from the insurance company getting to keep all of the money if you die too soon. A guaranteed period option will contract the insurance company to pay to the end of the agreed upon period of usually 10 or 20 years. If you die, these annuity benefits will pass to your beneficiaries and don't even pass through probate and aren't governed by your will.
