Annuities refer to plans which pay a fixed amount of income over an extended period of time. Annuity plans can be a good choice for supplementing retirement income. However, they can be a poor choice for some people because of high expenses.
Annuity
In a nutshell, annuities are an insurance product which produces income. Money is invested into the annuity and income is generated. Depending on the type of annuity purchased, funds are either deferred or paid immediately. One primary benefit of annuity investing is the opportunity to grow tax-deferred earnings.
Establishing annuity plans can be complex and confusing. It is best to work with a qualified financial or retirement planner. Although there are two basic types of annuities, several options exist. Each has advantages and disadvantages, including potential tax consequences and steep early withdrawal penalties.
Annuity Cash
The first type is known as deferred annuities because payments are deferred until a later date. Investors contribute funds during the saving phase and receive annuity payments during the income phase.
The second type is known as immediate payment annuities because payment plans begin immediately. The annuity is purchased with lump sum cash and installments paid for a predetermined timeframe.
Annuity Income
Each type of annuity can either be fixed or variable. Fixed guarantees a specific rate of interest, while variable is paid based on investment performance. Annuity payments can be established for a certain amount of time, such as 10 or 20 years, or for life.
The return on investment of variable annuities will fluctuate depending on the performance of selected investments. Variables are regulated by the U.S. Securities and Stock Exchange Commission (SEC), while fixed annuities are exempt from SEC regulations.
Annuity Products
Beneficiaries can be assigned to receive generated income derived from annuity plans. Many variables exist regarding beneficiary designations. The main selections include: spousal beneficiary, non-spousal beneficiaries, and unusual owner-annuitant designations such as married couples jointly owning an annuity.
Several payment options are available when establishing annuity payouts. The most common include:
- Single Premium Immediate Annuity: Insurance product is purchased with lump sum investment and immediately converted into guaranteed payouts for a certain number of years, or life.
- Deferred Annuity with Single Premium: Insurance product that pays current interest rates on accumulated funds.
- Variable Deferred Annuity: A variety of investment products are used to accumulate funds. Payouts vary based on product performance.
- Flexible Deferred Fixed Annuity: Accumulated funds earn guaranteed interest rates and provide the same amount of money with each payment.
Annuity Payment
The most prevalent disadvantages of annuity investing is the potential for hidden fees. In most cases, annuities are purchased through an insurance broker who earns a commission for the sale. On average, brokers earn 10-percent.
Then, there are annual fees such as investment management fees, insurance riders, and insurance charges which can add another 2- to 3-percent. And, if you need to withdraw money early, you'll incur a 10-percent penalty. Overall, that could equate to a loss of 13- to 23-percent.
Before investing in annuities talk to the professionals and weigh the risks. Many investors swear by annuity investing, while others won't even consider it. Only you can decide which is best for you.
Real estate investor, Simon Volkov shares additional information regarding the pros and cons of investing in annuities via his website. Simon offers a comprehensive investment article library which covers a wide range of topics including structured settlements, cash flow notes, and real estate. Learn which investment products are best at www.SimonVolkov.com.
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