In an era of time, when the nest egg of many baby boomers has dwindled in size due to a crash in the economy, more and smarter investors are looking to annuities instead of stocks, mutual funds or even a regular life insurance policy.
An increase in life expectancies is also prompting some to cash in on their whole life policies and invest the surrender value in an annuity.
Since annuities are least affected by market fluctuations, they a very low-risk investment vehicle for the safe-keeping of your retirement funds.
Currently, sales of fixed annuity are at their highest numbers in spite of extremely low-interest rates.
What is an Annuity?
An annuity is a financial product sold by life insurance companies but is very different from life insurance.
Life insurance financially protects your family after your death; annuities financially protect your retirement funds, while you are still alive.
How does an annuity work?
You pay your life insurance company a lump sum amount or choose to make regular payments over a period of time.
In exchange for your payment, you are guaranteed retirement benefits after a certain age throughout your life.
Annuities accrue low-interest rates but if you are looking for a safe and financially secure investment to safeguard your future, then an annuity is the best type of insurance, ensuring you have a steady income flow as long as you live.
Benefits of an Annuity
Benefits from an annuity can be received immediately or you can choose deferred payment.
An immediate annuity, as the name suggests, allows you to start getting a steady stream of reliable income immediately against a lump sum amount paid.
A deferred annuity is more suitable for younger people whose retirement benefits would be deferred until they reach a certain age set by the life insurance company.
Unlike traditional retirement vehicles like the IRA, 401(k) and Roth 401(k), there is no income ceiling on an annuity, there are no limits on contributions and withdrawals are not compulsory.
Moreover, earnings that accumulate in an annuity are tax-deferred and are backed by state guarantee funds.
Types of Annuities
There are two types of annuities:
1. Fixed Annuity: This type of annuity guarantees the rate of return on investment.
- The principal amount is guaranteed by the company.
- Interest is added to the annuity every year. The longer the term period, the higher the interest collected.
- 10% of the balance can be withdrawn annually. Withdrawals that are beyond this amount will be charged a penalty.
2. Variable Annuity: In a variable annuity, the interest accrued is invested in mutual funds selected by you.
- Your principal amount remains safe, but you may gain or lose more interest depending on the economic situation.
- You can get periodic payments, death benefits, and tax-deferred benefits.
In both types of annuities, you can choose payoffs according to your preference: either a lump sum amount or payments of specific amounts at pre-determined intervals.
You should seek advice from a financial advisor who can give you independent and objective advice taking your personal financial situation into consideration.
Before choosing an annuity, study up various types of annuities, the pros, and cons of each.
There are recurring charges that could include administrative fees, distribution fees, investment fees and surrender charges that you should be aware of.
If you decide to purchase an annuity make sure it is from a reputable life insurance company with a history of strong performance.
And a word of advice: don’t buy into a product you have not completely understood.
Compare the features of various life insurance annuity options from different life insurance companies to assess which one suits your particular situation the best.
Before you buy life insurance online, consider purchasing an annuity in addition to your life insurance policy.
There are BBB-accredited websites that offer personal service from unbiased life insurance professionals.
These qualified professionals can give you free life insurance advice.
Remember, annuities do not give you the high-interest rates you may be looking for, but they do offer a reliable steady growth of your investment and prove to be one of the few safe havens you can rely on in times of economic uncertainty, the security of your investment trumps all other factors!