Annuities
What are Annuities and How do they work?
An Annuity can be used to protect against the possibility of out-living ones income. An annuity is a savings vehicle to accumulate funds that could be used at a future date for a payout stream of income. Most people purchase annuities to accumulate funds on a tax-deferred basis. The interest you receive on your principal is not taxed, whether this is a Qualified or Non-Qualified contribution, an annuity provides tax-deferral until you recieve a distribution. As with any investment that is tax-deferred, money invested in an annuity can grow rapidly for three reasons:
- The original investment earns interest
- That interest earns interest, because it is automatically compounded
- The money that would ordinarily be paid out for taxes remains invested-earning interestAnnuities can also be used to structure a payout of a given sum of money over a specific time. This is commonly referred to as annuitization, which is the process in which funds are converted from an accumulated “bundle” into a steady income stream paid out in regular installments, usually monthly (optional time frames are also available)
- The various ways to annuitize the funds are as follows:
- Distributed on a regular, scheduled basis over a set time.
- Life Income
- Life Income Period Certain
- Life Income with Refund
- Life Income Joint & Survivor
These options need to be discussed with your representative. Annuities are a popular vehicle for accumulating funds for retirement.
- Types of AnnuitiesThe basic types of annuities are the following:
- Traditional Fixed Annuities- guarantees a minimum rate of interest credited during the accumulation period and a minimum amount of payout during the annuity period.
- Equity-Indexed Annuity- an annuity product with renewal interest rates that are linked to the market (equity) index such as S&P 500. Contract owner can enjoy safety of principal and minimum returns as well as gains in the market. This product offers several strategies to choose from.
- Variable Annuity- allows the investor to choose from a series of portfolios that range from conservative to aggressive rate of return. To sell a Variable Annuity you must be a Securities licenses representativeAnnuities are fairly illiquid products and should be purchased only if the owner intends to hold the product over the long term. Accessing an annuity’s values before the surrender charge period ends or before the owner is 59 1/2 could result in a surrender charge as well as a tax penalty.Life Insurance
Where an annuity is used to protect against the possibility of out-living ones income, Life insurance is used to replace the loss of income through death. An important part of life insurance is to identify the overall objectives that the client needs.
- There are many uses for Life Insurance:
- Survivor Protection
- Estate Creation
- Estate Conservation
- Cash Accumulation
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