Annuities

It’s a scary financial world out there right now, and many investors look to annuities for a safety net. Buying annuities is a great way to safeguard fixed-income dollars and retirement savings. They can only be purchased through insurance companies, so working with an insurance company you’re familiar with makes the process more comfortable. Basically, by purchasing an annuity you’re entering into a new contract with your insurance company.

Annuities can offer insurance in the case of a lost job or supplement retirement savings. Investors always have the option to “annuitize”, which means the principal of the annuity will be spread out in monthly payments in order to provide a stream of income over a long period of time. However, some savvy investors find that fees associated with annuitizing can be expensive and often earnings are taxed as ordinary income. Both of these factors can really cut into the return you see from your annuities. Again, this is why it’s important to work with a bank you trust or insurance company you trust.

When deciding whether or not to invest in an annuity, you must ask yourself when you will need to begin accessing your money. During the first years if the life of an annuity, investors may face hefty fees for withdrawing money. You must be confident that you won’t need the money you’ve invested until after the high-fee period is over. Annuities also allow for tax-deferral, so there is also the possibility that you may have to pay back some of the deferred taxes to the IRS if you access your money before retirement age. That said, the investment you make in an annuity is truly the perfect fit if you plan on using the money well into the future and after retirement age.

If you’re looking for income security after retirement, there are a lot of benefits to investing in annuities. Lifetime income is guaranteed once you enter into the contract with your insurance company. There is also no limit to how much you can contribute, meaning you decide how big you want your regular payments to be. Also, if you find that one of the investments within your contract is not performing well, you can change investments without paying taxes.

The most common type of all annuities is a fixed rate annuity. As an investor, you pay the insurance company a predetermined amount of money and, in turn, the insurance company makes predetermined regular payments (typically on a monthly basis) for the life of the annuity. With good planning and management, this can provide an investor with a steady, lifelong income.

You may be asking yourself what the catch is when investing in annuities. Luckily, there isn’t really one for the investor. So then how does the insurance company make money? Basically, they are using the money you give them upfront to make large, sometimes high-interest loans. Oftentimes, they end up making more money in interest on the loan than they have to pay you. They take the gamble so you don’t have to.