In its most general sense, an annuity is an agreement for one person or organization to pay another a stream or series of payments. Usually, the term “annuity” relates to a contract between you and a life insurance company, but a charity or a trust can take the place of the insurance company.
There are many categories of annuities. They can be classified by:
- Nature of the underlying investment – fixed or variable
- Primary purpose – accumulation or pay-out (deferred or immediate)
- Nature of pay-out commitment – fixed period, fixed amount, or lifetime
- Tax status – qualified or nonqualified
- Premium payment arrangement – single premium or flexible premium
Because most people’s retirement income will come from their personal savings, it is important to plan out how you want to grow your assets. Annuities are a safe way to grow your savings on an income tax-deferred basis. Some of the benefits to annuities include tax advantages, potential for lifetime income, safety features, and payout flexibility.
An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.
Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments.
While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates. If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.
There are generally three types of annuities — Fixed, Lifetime Income, and Hybrid Annuity.
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WHAT ARE FIXED ANNUITIES?
A fixed annuity is a type of investment that offers a guaranteed fixed rate of return over a specific period of time. It is a contract between an investor and an insurance company, in which the investor makes a lump-sum payment or a series of payments to the insurance company, and in return, the insurance company agrees to make periodic payments to the investor, either immediately or at a later date. The fixed rate of return is determined at the time of purchase and is not affected by fluctuations in the market. This makes fixed annuities a popular choice for investors who are looking for a predictable and stable income stream during retirement. Some fixed annuities also offer the option for the investor to receive a guaranteed minimum interest rate, regardless of market conditions, which can provide added security for the investor.
WHAT ARE LIFETIME ANNUITIES?
Lifetime annuities, also known as straight life or immediate annuities, are a type of investment that provide a guaranteed stream of income for the remainder of the annuitant’s life. The investor makes a lump sum payment, or a series of payments, to an insurance company and in return, the insurance company agrees to make regular payments to the investor for the rest of their life. These payments can be fixed or variable, and can start immediately or at a later date. Lifetime annuities are a popular option for retirees who want a guaranteed income stream to supplement their social security benefits, pension, and other savings. The advantage of lifetime annuities is that they provide a guaranteed income for the rest of the annuitant’s life, even if the investment runs out of money, which can provide added security for retirees. However, it’s important to note that once the money is invested in a lifetime annuity, it cannot be accessed again, unless for specific circumstances.
WHAT ARE HYBRID ANNUITIES?
Hybrid annuities, also known as fixed-indexed annuities or equity-indexed annuities, are a type of investment that combines features of both fixed annuities and variable annuities. They offer a guaranteed minimum rate of return and a potential for additional returns based on the performance of a stock market index, such as the S&P 500. The investor makes a lump sum payment, or a series of payments, to an insurance company and in return, the insurance company agrees to make regular payments to the investor, either immediately or at a later date. The guaranteed minimum rate of return ensures that the investor’s principal is protected, even if the stock market index performs poorly. However, if the stock market index performs well, the investor has the opportunity to earn additional returns. Hybrid annuities can provide a balance of safety and potential for growth, making them a popular option for investors who want the benefits of both fixed and variable annuities.
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