An annuity is simply a contract with an insurance company. There are several types of accounts available depending on your financial needs and goals. Fixed, indexed, immediate, deferred, variable and structured annuities are most common.
Annuities are used for growth, savings and to provide guaranteed income – both now and in the future. Sometimes an annuity account might serve multiple purposes. They can defer gains now in order to create income in retirement. One size does not fit all so it’s important to explore all of your options.
Annuities are popular with investors for a variety of reasons. Consumers like their predictable returns, protection of principal, tax deferral and/or systematic income. These insurance contracts are commonly used to create steady streams of income during retirement.
Annuities can offer significant tax advantages as well. Bank certificates of deposit and many other savings accounts are taxable even when interest is not withdrawn.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 increase growth. 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.
Some 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 access to your principal during the maturity period, usually 5-10% 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 4% then the internal return of the insurance company is higher – maybe 4.25%. 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.
Did you know:
- Total annuity assets under management are over 4 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 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.