To answer the question “What is an Annuity”: an annuity is an insurance product that protects you from outliving your income sources.
In exchange for a single payment, an immediate annuity promises to pay a stated income amount for the rest of your live. The income will continue even if you turn out to be the longest lived person in history. No matter how old you get, they must keep paying.
For example: Retiree John Healthy gives XYZ Assurance Company a $100,000 from his savings and XYZ promises a lifetime income of $567 a month for the rest of his life. If John steps off the curb without looking and is hit by a bus the next day, the company no longer has to pay the income, but they do keep the $100,000. However, if John is still alive at age 132, the company will still pay the $567 a month.
Immediate annuities have a number of options and quite a bit of fine print that you should know about before purchasing. (Please see “Finding the Best Single Premium Immediate Annuity Rates”.)
Tax Deferred Annuity Policies
Insurance companies also issue annuities that are designed to provide income at some future date that is not specified. The would be retiree deposits savings into the annuity in the form of premiums. The insurance carrier puts that money to work in their investment department and pays interest to the annuity holder. Annuity interest is almost always accumulated, not distributed. Over a period of time the annuity interest compounds and the cash value grows to provide a source of retirement funds.
The interest in a deferred annuity compounds tax free and these types of products are often called tax deferred annuities. At any time in the future, the annuity owner can either surrender the annuity for its accumulated cash value or exchange the cash value for a lifetime income. (see “How is a Tax Deferred Annuity Plan Taxed”).
There are a number of different variations of tax deferred annuities and they are usually categorized by the types of investments that underlies their cash value growth. Even though all tax deferred annuity policies are structurally similar, the differences in their funding source can make them quite distinct. (see “Types of Retirement Annuities”)
Please work with an expert at matching your individual financial and retirement planning needs to the most appropriate annuity.
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