Are you faced with the very real possibility of retirement in the year future? Then you are probably thinking about annuities.
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Isn’t that just like you? You work hard your entire life and worry about where your next paycheck is coming from. Now, even when though you are approaching retirement age, you’re still worrying about something!
Who can blame you? Times are uncertain, and the economy is shaky at best. If you’re wise and really contemplating your financial future, you have to take the options of annuities seriously. Let’s start with a basic question: why? Why are annuity contracts so popular?
What Annuity Contracts Guarantee
Annuity contracts are insurance products that guarantee a series of future payments to a buyer, set to start on a specified date (or an event). In exchange for this paying this benefit, the buyer pays the insurance company either a lump sum or a series of premium payments for several years. The payments continue until the death of the insured, at which point, all remaining funds are transferred to a survivor or forfeited.
You could say that this type of insurance contract is a form of longevity insurance. The longer you live, the better, because you will be receiving regular payments every month. Annuities are usually mentioned in the context of retirees. However, these contracts can also be purchased for younger individuals who are expecting a structured settlement due to a court victory.
The question is: why would a person want an annuity contract instead of simply holding the money in a savings account and using some self-control? There are a number of circumstances that might prompt a person to buy an annuity contract instead of keeping a huge savings account balance. For example, what is a person going to do to ward off the threat of inflation? Furthermore, if there were a way to get more money back over the long-term than you initially invested (sort of like reverse financing) wouldn’t it be worth pursuing? That’s the idea behind the annuity insurance product. It simply has less risk and reward that other investments like stocks.
Types of Annuity Contracts
There are many types of annuities to choose from. One of the most important decisions in choosing an annuity contract is deciding whether you want a fixed, variable or indexed policy. The best way to understand these terms is to ask yourself, what type of risk are you willing to take, and how much money do you want returned to you on a regular basis?
The first type of contract to discuss is a fixed annuities policy. This contract sees the insurance company guaranteeing a rate of return. This is a reassuring contract, because you can count on that money coming in every month, the same way you used to breathe a sigh of relief whenever you saw that salary paycheck at work. The disadvantage of this type of contract is that the return is modest. However, it’s safe and safe is what many people want in their retirement years.
Another option within this category is a deferred fixed annuity plan. This plan allows insureds to deposit part of their salary into a retirement savings account, and be spared taxation. This wealth can later be converted into annuity payments.
Variable annuities are riskier than fixed rate annuities, but also hold more potential for increasing your balance and monthly payments. This type of contract requires you to put your money into stocks and mutual funds. Returns fluctuate with this plan and do sometimes go “in the red.”
This is an unpredictable savings plan, since it is greatly influenced by the turn of the market. You do have some form of “safety” however, if not an outright guarantee. Namely, this safety comes in an understanding of “history”—that is, the history of the market return—as well as asset diversification. These policies are typically deferred. Variable annuities are favored by younger men and women who are not quite ready for retirement, and who can afford to take a bigger risk.
Lastly, there are index annuities. These are contracts that operate as an in-between of fixed and variable plans. They split the difference, and attach the return rate to an item known as the “Standard and Poor’s Stock Market Index”. This is a handy plan, because it actually lets you actively participate in the market. There is also greater potential for protecting your money.
Comparing Policies and Insurance Companies
How do you go about comparing annuity policies from various insurance companies? The major areas to keep in mind are: liquidity, investment type and timing.
- Liquidity options are best understood when you compare withdrawal penalties, which in turn, become reduced returns.
- Types of investment include fixed or variable annuities, including some special “high grade” securities.
- Timing has to do with immediate payouts (executable within just a matter of days after payment is received) or deferred payouts (which take place after a specified time). You should also compare annual fees on all contracts.
Before deciding on a policy, make notes on any special inclusions that could be to your benefit, such as cost of living protection (which is basically a type of fixed annuity contract that protects you against inflation) and long-term care or disability coverage. Yes, some annuity contracts do include provisions for long-term care, and allow for a minimum payment to be delivered in the event you become disabled in some way.
The price of an annuity contract also depends on when the benefit ends. In many contracts, the annuity benefit continues after your death—it is passed on to a beneficiary. If you choose to pass on the benefits to your surviving spouse, the policy might be slightly more expensive.
In the end, the only way to know for sure which contract is ideal for your situation is to compare your options and make an informed choice. Use a comparison website and get quotes on the best policies in your area and for your budget. Remember, that instant quotes are only a general idea for your basic demographic. In order to provide a real quote, the insurance company must take into account your personal and professional information. Why not start using free zip code search tool today and get the annuity quotes that you deserve?