Performing an online annuities comparison will yield a list of investment vehicles that offer a stream of future income. This is the type of investment many people purchase when they have maxed out their contributions to their 401K or IRA. Annuities have tax deferred features that make them an attractive retirement option.
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Annuities can be a bit complex for the novice, but a little research will go a long way. You can get a crash course on annuities, and before you know it, you’ll be shopping for them. You will learn that an annuity is guaranteed to outlive you rather than you outliving it.
What is an Annuity?
An annuity is an investment that produces a tax deferred future income source. Most people purchase them for retirement, although they can be purchased for other objectives as well. To purchase an annuity you enter into a contract with an insurance company who invests a lump sum of your money. You can either receive an immediate payout or make additional contributions for a future payout.
Types of Annuities
There are several types of annuities and many variations available for an annuities comparison. The basics are:
A fixed annuity offers a guaranteed minimum rate of return on interest earned. This interest is accumulated based on terms, an indexed rate, and life expectancy. A variable annuity offers a risk factor by investing a percentage in the stock market. An indexed annuity is a combination of a fixed and variable annuity.
The three basics are combined with subcategory options to maximize your investment return or minimize the risk, therefore the return. An example would be an equity indexed option. The equity is based on the return from market shares while the index is determined by the predetermined indexed method. Another would be a split annuity that covers immediate financial needs as well as provide a future income stream.
How Annuities Work
Once the contract is established between the purchaser and the insurance company, the decision is made whether to receive an immediate payout based on the terms, or continue to make contributions until the designated time. Payouts are usually issued at age 59 and a half.
The payouts are issued until the end of the life expectancy. If the owner and annuitant pass away before the payments are completed, they either go back to the insurance company or are paid to a beneficiary which may be the insurance company. The owner in most cases is the annuitant, although the owner may choose anyone as the annuitant.
Costs and Fees Associated With Annuities
The financial adviser or insurance representative who manages your annuity receives their compensation in fees. They receive a percentage up front and a percentage of the investment return. If you withdraw or close the account prematurely, generally within five years, you may incur a 10% annuity surrender penalty.
Annuities Comparison Shopping
Annuities comparison shopping should not be a daunting task. There is enough information online that will offer a basic to clear understanding of annuities. Financial planners are happy to give an explanation if it could mean future business.
Everyone has different financial needs. Choosing an investment vehicle depends on your needs. Each contract has several options to customize your product. Some of those options include:
- Immediate or Deferred Payout Option
- Fixed, Variable, or Indexed
- Frequency of Payments – Monthly, Quarterly, Bi-annually, or Annually
- Amount of Contributions
- Annuitant(s) and Beneficiary
- Participation Rate
The participation rate determines the percentage of return you will receive on the investments made. This rate allows you to control the amount of risk.
Taxes on Annuities
Taxes on annuity withdrawals are based on last monies in. The last amount of money earned is the first money taxed. The initial investment is not taxed because it is in most cases after taxed dollars. If the initial investment is rolled over from a 401k or IRA, withdrawals are taxed.
Annuities Comparison with Other Investments
Some people do not think the annuity is the best investment option. That assessment could be considered a myth in that it all depends on the financial need of the investor. Sure there are other forms of investment that might yield a greater return over the long haul, or in the immediate future.
Stocks, bonds, commodities, and real estate are all other good forms of investment. So are insurance policies and IRAs if you are planning for retirement or premature death. The idea is to earn interest while establishing a tax shelter. If you are the investor, you may want to control the risk factor with annuities while saving for retirement; although, you have made the maximum contributions to your 401k, and your real estate holdings seem secure. It is your future…
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