An annuity is simply an insurance contract. There are several types available depending on your financial needs and goals. Fixed, immediate, indexed, variable and structured annuities are most common. Annuities can begin income payments after only one month – or defer gains for a lifetime.
Annuities are popular in the financial world for a variety of reasons. Most types offer predictable returns, protection of principal, tax deferral and/or systematic income. These insurance contracts are commonly used steady streams of income during retirement.
Annuities can offer significant tax advantages as well. Certificates of deposit at the bank and many other growth accounts are taxable even if the interest in not withdrawn. Non-qualified annuities, on the other hand, can grow tax-deferred lessening taxable income for their owners.
Interest compounds daily with many annuities helping to grow the overall account. If and when desired, principal and interest gains can be annuitized for a guaranteed stream of income during retirement. Deferred income annuities are widely used to create lifetime income.
Albert Einstein said compounding interest was a great inventions of the modern world. He understood this simple and powerful concept in action was an important key to wealth accumulation.
*A qualified annuity (IRA or 403b) may require a mandatory distribution at age 70 and 1/2. You should always consult your accountant for tax advice.
Annuity accounts are extremely flexible. Maturity terms can range from as little as 1 month for an immediate annuity on up to a lifetime of tax-deferral. An account with a longer maturity usually offers a higher interest guarantee and/or premium bonus. Many insurance companies offer 1st year premium bonuses between 5-10% for terms longer than 10 years.
Many annuities allow you to add money throughout the duration of the contract without restarting the surrender period. And many contracts allow for systematic interest withdraws on a monthly, quarterly, semi-annual or annual basis without penalty. Unlike banks CDs, annuity accounts also offer you access to a portion of your principal during the maturity period, usually 10-20% of the account value if needed.
There are two common myths concerning annuity insurance contracts. The first is you have little access to your principal during the maturity period. The second is the insurance company can keep your funds at passing. These myths are simply not true.
Another common myth is that annuities have high fees. They do pay a commission to the agent, but that amount never depletes the invested principal. Most annuities work on spreads – just like bank deposits. If the account offers 3% then the internal return of the insurance company is higher – maybe 3.25%. That extra .25% is used to run the daily operations of the insurance company and compensate the agent.
Tax deferred annuities are all around you. Many state retirement plans like Public Employee Retirement System and State Teachers Retirement System use these contracts for their employees. Every year, billions of dollars from individuals and employers flow into annuity accounts for many of the above mentioned reasons. In fact, total annuity sales for 2014 were over $229 billion which was a 3% increase over 2013 and over an 8% increase from 2012.
Did you know:
- Total annuity assets under management are nearly 3 trillion dollars
- Sales of fixed income annuities have nearly doubled over the last decade
- Over 35% of households own an annuity account
- Over 40% of annuity buyers cite regular income as a primary reason for purchase
- In most states, fixed annuities are insured up to $250,000
There are several different types of annuities available for purchase and one size does not fit all. Different annuity accounts can be used to diversify a portfolio and accomplish an overall strategy of growth and steady income.
The bottom line is annuity insurance contracts are appropriate for conservative investors, but they may not be right for everyone. Annuities can safely provide reliable returns, monthly interest, lifetime income, tax-deferred growth, safety of principal, and most importantly peace of mind.