How To Understand Benefits of an Annuity

Annuities guarantee lifelong income in exchange for contributions. There are several kinds of annuity plans. Each kind has its pros and cons:

  • Fixed Annuities offer the lowest guaranteed interest rates and add up based on a declared basic interest. Their funds are typically invested in securities and bonds.
  • Variable Annuities, on the other hand, function like mutual funds. Often, charges are associated with these.
  • Immediate Annuities pay out on a single contribution basis. The level of the payout is contingent on the insurance provider and is based on whether it is fixed or variable.
  • With Deferred Annuities, you can make tax-exempt contributions over a set period of time. The lump sum and pension for payout is determined by the plan's cash value at the time of its maturity.

Despite the many kinds of annuities, there are benefits that are generally the same throughout. The benefits of purchasing an annuity, regardless of the type purchased, include the following:

  • Guaranteed Income. Annuity payments are guaranteed for life, even if they're variable. They help you stay afloat if you end up living beyond your life savings.
  • Unlimited Contributions. You can invest pretty much any amount you want in an annuity. There are no limits whatsoever. Whether you want to invest $100,000 or $1,000,000 and beyond, you can do so in single or multiple contributions.
  • Lack of a Probate. The cash value of an annuity is easily transferred to beneficiaries in the event of your death. It's that simple.
  • Low-risk Opportunity for Investment. Since the funds of an annuity are pooled, and its portfolio diversified, annuities are low-risk investments. In addition, fixed annuities are guarded by the kinds of investment tools the investors possess.
  • Protection. Even if your financial worth goes kaput, the money you invest in annuities cannot be liquidated, keeping them safe from being used to pay off any debts you may have. Their purpose is to keep your welfare protected, and they do so according to law. They're often guaranteed by reserve or statutory funds.

If you purchase an immediate annuity, you also get the following benefits, in addition to the ones mentioned above:

  • High Annuitization Rates. Some immediate annuities have payouts at rates as high as 10%. Also, if your immediate annuity is fixed, it's pretty much a guarantee in exchange for a single-occasion investment.
  • Tax Exemption. Immediate annuities are generally tax-exempt, regardless of how high the payout is.

Deferred annuities, meanwhile, offer tax breaks on your contributions as they accumulate. If your annuity plan is variable, you can expect higher return rates without risk of inflation.

Insurance providers can also throw in bonus rates and clauses to your annuity plan, thereby greatly affecting the quality of your plan. Look for flexible annuitant-friendly plans that don't have clauses that oblige you to continue making contributions despite that annuity's poor performance. Your annuity should ideally work for you, instead of the other way around. With a good plan, you can be assured of a comfortable retirement.


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