Annuities: An Introduction
We are making annuities accessible to everyone.
Annuities are an insurance product that pays out income over a pre-defined period of time or for however long you live. They are often used as part of a retirement financing strategy.
Annuities are a popular option for people looking for a steady stream of income later in life. Unlike mutual funds, bonds, or stocks, annuities is not sold by wire-houses or stockbrokers but by life insurance companies.
What Makes Annuities So Attractive?
Stays With You
Annuities are a popular retirement option because they can offer a steady stream of income for however long you live. While you may select a term-annuity, a life-long annuity can significantly increase your cash survivorship.
Annuity plans can be constructed however you like. They usually consist of an accumulation phase where you put money into the annuity, and a payout phase where money is taken out again. But the length of these periods, the size of payments and payouts are easily tailored to one’s needs.
There is no limit on the amount that can be invested into an annuity. This means an annuity can be a good alternative to traditional IRA/401K plans. However, while IRA plans allow you to contribute tax-free dollars, annuity plans only Annuity only allow for tax-free growth prior to payout.
The Life of An Annuity
An annuity typically consists of three stages or steps: accumulation, annuitization and payout.
This is the period during which the holder of the annuity makes payments to the contact. This period begins as soon when the contract is set and lasts until the first payout. Some contracts may have no accumulation but have immediate payouts follow a single lump sum payment.
This is the moment when payments back to the annuity investor begin. As mentioned earlier, payments can begin immediately a lump sum contribution.
This is the period during which payments are made to the annuity investor. The length of this phase can vary but is often linked to the contract holder’s life expectancy acting as a pension replacement.
Different Types of Annuities
A major advantage of an annuity is that the principal you contribute to it will grow tax-deferred. How it grows however depends on the type of annuity contract selected.
A fixed contract guarantees to return both the principal and an interest. This product is often suitable for individuals with very low risk tolerance. The downside of fixed annuities is that payout rates do not increase to reflect inflation meaning the value of your money will decline over time.
An index contracts offers a guarantee of principal but interests are indexed to a major stock market index with downside protection. This means allows the investment to trail the stock market but remains protected in case of a stock market crash.
Variable contracts do not offer fixed income payments but follows underlying investments in mutual funds, money market accounts, and bonds. These products can be complicated but can offer a higher payout. They are often associated with higher fees and a real risk of losing one’s principal.