You should buy an annuity if you gravitate towards low risk investments and are looking for a steady future income. To supplement your retirement, annuities are ideal.
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If you have received a large amount of money and want help making it last for the rest of your life, you may also want to consider an annuity. However, if you are looking for a short term investment, a very liquid investment or one that will give you a high rate of return, an annuity is not the best choice for you. Learn more about annuities so you can make the best choice possible about whether or not you should buy an annuity.
Understanding Annuities
An annuity is an investment, typically sold by insurance companies, as well as other specialized annuity firms and investment professionals. With this type of investment you can pay into it over a period of time or in a lump sum. After a pre-set time period, you will receive payments from your annuity that will continue for the remainder of your life.
This is a guaranteed type of investment that you can count on as future income, making it very appealing to those who try to avoid risky investments. For individuals who do not have a private pension or feel insecure about the reliability of Social Security, annuities are the perfect solution. For most people who invest in annuities, it is a form of retirement planning.
An immediate annuity is a less common type of annuity, but one that definitely has a purpose. If you have come into a large amount of money, from an inheritance or lottery winnings, you may be concerned that it will not last for the rest of your life. If you place it in an immediate annuity, you will begin to receive monthly payments on the amount until your death.
Advantages and Disadvantages of Annuities
As mentioned above, one of the big advantages of annuities is the fact that they are very low risk investments. Their guaranteed rate of return makes for very easy retirement planning. Income from annuities is guaranteed, which is a huge attraction for anyone concerned about the current and recent state of the economy.
Tax breaks with annuities are very advantageous. The money you have invested accumulates tax-free, until payments are made to you, typically at a point in life when your income is much lower than during your work years. There is also no limit to how much you can invest in annuities.
A major disadvantage includes the fact that annuities are not very liquid. If you need to access your money, there are penalties as high as 10%. Make sure that the money you are investing in annuities is money you will not need for a long time.
Another disadvantage is that fees for annuities are very high, especially compared to other types of investments. They often run 2-3% of your investment, much higher than the 1% or lower associated with other investments.
Buying Annuities
If you are in the market for an annuity, take the time to learn about and compare the different types of annuities to find the one that best fits your needs. The differences can be quite significant, and the one that a friend recommends may not be the best one for you.
You should also bear in mind, as with so many financial products, there can be great differences between companies. Therefore you need to get quotes on annuities from different companies and compare them carefully based on rate of return, fees and the company itself.
You can check out companies offering annuities by getting their insurance rating from one of the leading independent insurance rating organizations like Moody’s, Standard & Poor’s or A. M. Best. These ratings tell you how financially stable the company is and what its outlook for the future is. Since the company will hold your money for a significant period and promises to pay you for an extended time, you will want to go with a very stable company that will be still in business when you need to get paid.
In addition, your state department of insurance can provide you with information about the customer service record of any insurance company you are considering getting an annuity from. An online search for complaints and reviews can also tell you how actual customers feel about how their annuity company treats them.
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