Annuities are a form of long-term investment that offers the promise of lasting income. Essentially, when you acquire an annuity from an insurance company, they take your money and invest it in chosen ventures that are likely to bring a profit over time. After the funds have accrued value, regular payments will start being sent out to you as part of the annuitization process.
Annuities provide a dependable flow of money in retirement which can help you manage your budget and pay essential costs. The details of the annuity will determine the length of time you receive payments – it could be for a predetermined period or, like Social Security, until the end of your life.
First of all, it’s important to understand who the parties are to an annuity. Typically there are three parties but in some cases, there are four:
With almost every annuity contract, but not all, the annuitant and the owner will be the same individual.
The way your annuity works depends on the type of annuity you purchase which is generally based on your financial needs. There are four types of annuities to choose from with each differing on when you want to begin receiving payments and how you would like your contribution(s) invested:
For those nearing retirement age and seeking reliable monthly income, an immediate annuity is a great option. This type of annuity can begin providing payments within just twelve months of purchase and is typically funded via assets from a 401(k) or IRA account. Single premium immediate annuities are ideal for those ready to retire but still want the comfort of dependable income.
A deferred annuity provides a great opportunity for your investments to accumulate without taxation until retirement. This is because you won’t start receiving payments until sometime in the future, like retirement. Consequently, your money has a chance to grow and gain value over time.
With variable annuities, payments are made to the annuitant in regular intervals which depend upon the success (or lack thereof) of sub-accounts. Comparable to mutual fund organizations, these payments vary in size relative to how well the sub-accounts are performing at any given time.
For those individuals who have a very low appetite for risk, a fixed annuity could be the best fit since the interest rate on your investment is guaranteed and will not deviate for the life of your contract.
Since your annuity will grow tax-deferred, you will not have a tax liability until you begin receiving payments or take withdrawals. Additionally, your tax liability will depend on whether you purchased your annuity with pre-tax dollars or after-tax dollars.
If you purchased your annuity with pre-tax dollars, any funds you receive will be considered income and will be taxed according to the total amount of each payment received.
If, however, you purchased your annuity using after-tax dollars, you would only pay taxes on the earnings of the annuity, not the contributions.
Most insurance companies that offer annuities offer a variety of optional riders depending on which type of annuity you purchase. Since most riders cost extra, it’s important that you discuss your needs with your insurance professional.
Here are the most common riders for your consideration:
In many cases, your annuity will include a death benefit for your designated beneficiary(s), if you purchase an annuity that includes a death benefit or the company will allow you to add it as a rider. Moreover, you may be allowed to add enhanced death benefits depending on the insurer. Generally, the death benefit is paid like a life insurance death benefit.
If you are considering an annuity for additional retirement planning, take a few minutes to speak with an insurance professional at LifeInsure.com to find out if an annuity would be a good fit for your retirement planning.
The experienced and reputable team at LifeInsure.com will be happy to answer any lingering questions and help you develop retirement planning solutions that will meet your needs and budget.
You can reach us at 866-868-0099 during normal business hours or contact us through our website 24/7.
Your tax liability depends on if your annuity contributions were made we with pre-tax or post-tax dollars. If you used pre-tax dollars, 100% of your annuity payments are considered income and are taxable. If your contributions were with post-tax dollars, only the interest earned is considered income.
With an immediate annuity, you will start receiving income immediately after investing, but with a deferred annuity you begin receiving regular payments when the deferment period has ended.
If you’re about to retire and are ready to start dipping into your savings account, an immediate annuity could be a good fit. Not only do the payments start right away, it’s one of the few ways to turn your savings into income that you cannot outlive.
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