What is an annuity?
An annuity is a contract issued by an insurance company that provides for a series of regular periodic payments to the annuitant. These payments can be for life, for a fixed period of time, or for life with a guarantee of a minimum number of payments; whether or not the payments are ever made is at the discretion of the policy owner. Although the contract does provide for a series of payments, many times the policy owner decides to take the annuity funds in some other manner. The funds placed in an annuity earn interest on a tax-deferred basis. This means that the interest is not taxed as earned but only when the funds are withdrawn. Unless regular periodic payments have been elected, withdrawals must be made from the accumulated interest first. If regular periodic payments are elected then each payment is part interest and part return of premium. An annuity contract is a valuable tool in retirement planning but it is also very useful for maximizing the return on money, as compared to
Simply stated, an annuity is an investment vehicle which allows you to accumulate savings and to earn additional income toward your retirement. The annuity itself is similar to an insurance policy. Unlike other retirement investment vehicles, such as IRAs or 401(k) plans, your annuity will have a specific contract term, e.g., ten years. You purchase the annuity by making payments into it from your earnings during your working years. Then, when you retire, you may elect to receive a fixed monthly sum annuity payment for the remainder of your life. In some cases, you may elect to receive a lump sum payment or “roll over” your annuity balance into another investment vehicle. The annuity provides a tax shelter because it is funded with pre-tax dollars. In other words, money is deducted from your earnings, before taxes are taken out, and then contributed directly to the annuity fund. You do not pay taxes on the money when it is earned. This may benefit you in a number of ways. Most signific
An annuity is a contract between you (the purchaser or owner) and an insurance company. In its simplest form, you pay money to an annuity issuer, and the issuer then pays the principal and earnings back to you or to a named beneficiary. Annuities are generally used to provide income in retirement. The biggest advantage of an annuity is that your money grows tax deferred until you withdraw it. The tradeoff is that if you take your money out before age 59½, you’ll usually have to pay a 10 percent early withdrawal penalty to the IRS. Most life insurance companies sell annuities. You pay the insurance company a sum of money, either all at once or incrementally. The type of annuity you own determines whether your money earns a fixed amount or an amount that depends on the equities in which the annuity is invested. At a designated time chosen by you, known as the maturity date, the insurance company generally begins to send you regular distributions from the annuity’s account. Or, you may be
Annuities have been in existence for well over two hundred years. The very first mention of Annuities in the United States was the use of these products by the Presbyterian Church in 1740 to provide security for the clergy and widows. Annuities allow you to accumulate tax-deferred funds for retirement and then, if you desire, receive a guaranteed income (this process is called Annuitization) payable for life or for a specified period of time: generally a term of five or ten years. Annuities are offered by Insurance companies and sold through licensed agents. The insurance company must be evaluated and licensed in your state as does the agent. State insurance commissions scrutinize Insurance companies to ensure they have reserve funds, commonly referred to as State Legal Reserve Pools, in place to protect investors before granting insurance companies licenses. If an insurance company goes out of business other insurance companies licensed in state must assume bankrupt insurers obligatio
