In planning and preparing for retirement, there are many different types of investments you can consider. Annuities are one type of investment that are growing in popularity. They allow you to invest a lump sum amount and then one day receive a steady income. Read on to learn more about annuities.
What Is an Annuity?
Annuities are a type of investment account issued by an insurance company as part of retirement strategy that pays out a future income. Annuities allow you to set money aside and have that balance increase each year without having to pay taxes, and then ultimately receive a stream of future payments on a timetable that you can control. In exchange for your lump-sum payment, the insurance company agrees to provide you with benefits, including:
- An income for a set period of time or for life
- Accumulation and asset growth
- A death benefit
- Long-term care benefits
Unlike IRAs, there is no limitation on how much money you can place in an annuity. However, once you begin receiving annuity payments, they will be taxed as ordinary income. Annuities are also sometimes included as part of a settlement of a personal injury or other civil lawsuit. With structured settlements, the defendant's insurance company funds an annuity for an injured plaintiff.
How Annuities Work
Essentially, by making an investment in an annuity, you'll receive a payment at a future date, or a series of dates. You can choose to receive annuity income monthly, quarterly, annually, or in a lump-sum. Your premiums are invested in different accounts, usually mutual funds, but more conservative options are available. You can control where your premiums are invested, and you ultimately control the overall returns on the annuity.
Annuities differ from other types of retirement vehicles in several ways. For example, there are higher fees and expenses associated with annuities than with other types of investments. This is due to the insurance component of annuities, and insurers who sell annuities make money off these fees. Also, if you die before receiving all of your annuity payments, the insurance company will keep remaining amount in your fund after settling your outstanding obligations.
Types of Annuities
Annuities can be either immediate or deferred. Immediate annuities are ones that start paying income right now, meaning in less than one year. In contrast, deferred annuities start paying income at a future time, typically between 1 and 50 years from the date of purchase.
Annuities can also be fixed or variable. Fixed annuities will provide you with a definite number and amount of payments under the conditions that were determined when you bought the annuity. In contrast, the principle value of a variable annuity will depend on the performance of the sub-account values to which your money is allocated. Variable annuities allow you to participate in the stock market while still enjoying the tax-deferred, insurance, and lifetime income benefits that annuities provide. For this reason, variable annuities are sometimes called "mutual funds with an insurance wrapper."
Speak with an Attorney About Annuities
Deciding on what sort of retirement planning and investment strategy is best for you can be a complex process, and there are many factors to consider. In addition to speaking with a financial planner, if you have legal questions about annuities, you may want to consider conferring with an insurance law attorney.