What Are the Pros and Cons of an Annuity?
An annuity contract is created when an insured party (an individual) pays the life insurance company a single premium that will later be distributed back to the insured party over time. Annuity contracts traditionally provide a guaranteed distribution of income over time until the person dies. The majority of annuity customers use them to accumulate funds free of income and capital gains taxes and to later take lump-sum withdrawals without using the guaranteed-income-for-life feature.
The type of annuity right for you depends on what type of investor you are and how much you have to invest.
Pros and Cons of an Annuity
- The money you invest in an annuity grows tax deferred until you eventually start your withdrawals.
- Only the gains you made is taxed once you start making payments, and the tax rate is generally a lower than during the period when your working.
- The guaranteed income is another benefit.
- There are early withdrawal penalties if you cash in your annuity early.
- Fees are typically higher than with other investments.
Here are a few types of annuities.
Deferred Annuity: The deferred annuity is the most common types of annuity. Investors make regular payments in to the annuity until it matures, then receive payments at a guaranteed rate of return for a specific amount of time. Usually these annuities mature around the time that the investor retires and the payments last until they die. They offer a rate of return specified in the contract and can be fixed or variable.
Immediate Annuity: The immediate annuity works well if you have a large amount of money that you would like invested and spread out over time. Different than a deferred annuity, an immediate annuity is paid in completely up front and payments start immediately.
Fixed Annuity: Fixed annuity provides a guaranteed rate of return for an investor over the length of the annuity. Since the rate is guaranteed it typically won’t be as high as it would otherwise be if you were to invest your money in the stock market or mutual funds. The return is guaranteed and relatively risk free, however the annuity fees can be high and this will decrease your rate of return.
Variable Annuity: The variable annuity offers the investor the option to invest in a specific type of investment, such as a non-traditional investment. This investment options allows for your variable annuity to vary by issuer.
Equity Indexed Annuities: The equity-indexed annuity operates as a combination of fixed and variable annuities with a guaranteed rate of return with a variable element that allows the investor to take advantage of non-traditional investments.
If you would like to know more about Annuities, and if they are a good investment for you, call us and we’ll help you.
