Annuities can be a great way to set aside money for retirement. They are often the only form of guaranteed income that a person will have in their later years. In this guide, we’ll explore the primary reason why annuities are such an important part of retirement planning and what they mean for your legacy.
Guaranteed Lifetime Income
If you select for a lifetime payment, you will be paid a set amount of money for the rest of your life. Even if you make more money than the contract amount plus earnings, you will still get these payments from the insurer.
Annuities, sometimes known as private pension plans, are the only type of investment available on the market today that can give this sort of guarantee.
The only other sources of income that may be paid out in this manner are Social Security and an employer’s pension. However, most retirees nowadays do not receive income from a pension, so annuities have become increasingly popular as a replacement.
Annuities can provide a guaranteed lifetime income to you. It’s a question of looking for different insurance providers and comparing their offerings to see which one has the best payout as well as certain income guarantees for your money.
Guaranteed Protection of Principal
Guaranteed principal protection is the “insurance”, annuities provide. Principal protection is only available for fixed annuities, fixed indexed annuities, and immediate annuities. It isn’t valid for variable annuities.
Annuities are not FDIC-insured, as CDs, bank accounts, and other bank products are. With that said, life insurance companies are required by law to have at least one dollar in their cash reserves for every dollar of outstanding annuity premium they issue. This is yet another method through which your annuity insurer protects your principal.
Annuities, like bonds or CDs, are fixed-rate financial products that pay a predetermined interest rate. The specific rate is guaranteed for a set length of time. The higher the guaranteed rate becomes with more time, the more it resembles interest earnings.
To entice customers to buy a contract for the rate, some fixed contracts will pay a higher interest rate in the first year. The initial rate is usually referred to as a “teaser” rate.
Annuities with fixed rates will pay the stated interest rate for a certain length of time. The length of time this period lasts varies depending on the type of fixed annuity you are considering.
The annuity owner has the option to leave or commit their money for another term at the end of each period in both annuity types. The annuity will then begin paying a new rate of interest based on current interest rates from there.
Guaranteed Death Benefit
Most annuity contracts come with a death benefit. Additionally, Fixed index annuities and variable annuities can pay out an enhanced death benefit on the backend. In most states, beneficiaries of an inherited annuity avoid probate too.
Tax-Advantaged Retirement Saving
Annuities are the only kind of investment that may be invested in without having to join an IRA or retirement plan on a tax-deferred basis.
You can also put as much money into an annuity at one time as you want. The IRS does not place any restrictions on the amount of money that may be deposited into a non-qualified annuity contract.
Long-Term Care Insurance
Annuities sometimes provide a larger payout to a policyholder who becomes disabled or incurs long-term care expenditures.
- The Definition of an Annuity
- Annuity Formula Calculator
- Annuity vs. Pension
- What is a tax-deferred annuity?
- Are Annuity Payments Taxable?
I’m a licensed financial professional. I’ve sold annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.
My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you.