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Cheap Annuities

Cheap AnnuitiesYou want to save money when you invest, that is why finding cheap annuities is so important for many people. This is especially true if you are considering investing in variable annuities because the fees and costs can be quite high.

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There are several types of annuities that you can invest in. By understanding the benefits and drawbacks of your options, you can make a truly informed choice on investing your funds.

Cheap Annuities Come in Many Different Types

You can choose between:

  • Deferred Fixed Annuities
  • Deferred Variable Annuities
  • Immediate Fixed Annuities
  • Immediate Variable Annuities

Cheap Annuities: Fixed Annuities versus Variable Annuities

The difference between a fixed annuity and a variable annuity is that a fixed annuity has an established minimum interest rate that you can earn while a variable annuity does not. In addition, a fixed annuity has a guaranteed payout for an established period of time.

A variable annuity doesn’t have a guarantee because you choose your own investments. Many people prefer a variable annuity for just this reason. However, if you are looking for an investment that guarantees a return, then a variable annuity may not be right for you.

You need to be aware that if you are looking for cheap annuities then a variable annuity may not be the right choice for you for these reasons:

  • The management fees alone are about 3% of your total investment each year
  • In addition, your commission to your agent will be about 4%, which is 2% higher than a fixed annuity
  • Fixed annuities don’t have management fees

There are websites that specialize in no-load variable annuities. What this means is that you don’t pay management fees or a commission when you buy your annuity. The downside here is that if you aren’t an experienced investor, you could end up losing big.

When you hire someone to manage your annuity, they are monitoring how your investments are doing and will inform you if you start taking losses. Many people don’t have the time or inclination to follow their investments this closely.

One area where a variable annuity outshines a fixed annuity is if it does well. A fixed annuity doesn’t exceed a certain interest rate for the investor. When you agree to a contract, you are agreeing to a specific range for your return on your investment. While you are guaranteed a certain minimum, the insurance company caps your maximum as well.

With a variable annuity, you receive the full benefit of your investment if it does well, which is why there are more fees involved. Rather than the insurance company receiving the excess of your investment, it all goes to you.

In addition, this means that when your variable annuity starts to pay out, you may have a better chance of outpacing inflation. This is the reason why many investment experts recommend that you invest in other things, so that you can be sure to have enough money during your retirement years to live.

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Cheap Annuities: Deferred Annuities versus Immediate Annuities

One of the most important choices you will need to make is between deferred and immediate annuities. You have a couple of options when you are choosing a deferred annuity:

  • One time premium deferred annuity
  • Flexible premium deferred annuity

Most people choose a flexible premium, which means that premium payments can be made monthly, quarterly or annually.

When you choose a deferred annuity, you are choosing to invest your money now and start receiving your money at a later date. Typically you select an amount of time that you want to receive your annuity, for example 10 years, 20 years and so on. The amount of your annuity benefit will be determined by how long you select to receive your payments.

You can also choose a deferred annuity that guarantees to pay for the rest of your lifetime. If you choose this option then you will have to select how much you want to receive each month and your premium payments will be based on that number. In addition, if you choose a lifetime benefit, then you cannot choose a beneficiary for your policy; the insurance company receives it if you die.

If you choose a deferred annuity, you can withdraw your money at any time during your investment. There are plenty of fees if you surrender your annuity, which essentially means you close your account. However, it is nice to have that option if you have an emergency.

You can also withdraw up to 10% from your annuity each year without paying any penalties or fees. You are still responsible for any taxed if your investment is made with before tax money.

An immediate annuity pays you a fixed monthly benefit immediately after you make your investment. An immediate annuity is a single premium annuity, which means that you can’t add more money to your investment after you open the annuity.

You can choose to accept a lifetime benefit from your annuity or you can choose time frames, much like you would a deferred annuity, of 10, 15, 20 years or more. If you choose a lifetime benefit, you will have to determine what you want your monthly benefit to be and then pay the one time premium required by the insurance company.

Many people who experience a windfall of money will invest in an immediate annuity so that they are guaranteed a certain amount of income for the rest of their life. In addition, by investing that money immediately, they don’t have to pay a big lump sum in taxes, instead they pay taxes on their benefit, which many people find more manageable.

You cannot surrender an immediate annuity nor withdraw money from your annuity.

Cheap Annuities: The Pros and Cons of Investing in Annuities

As mentioned above, variable annuities have high fees associated with them; however, this isn’t the only disadvantage to choosing an annuity for an investment. There are other fees or penalties that you have to think about as well.

Surrender Fees

The first issue that many people face is that if they need to surrender their annuity, they can encounter fees of up to 50% of their total investment. This occurs only if you make the investment with money that you haven’t paid taxes on.

First of all, the insurance company charges fees for surrendering your annuity. These fees can range from 10% to 30%. After that, the IRS jumps in.

Taxes

Taxes and annuities work as follows; if you paid with before tax money, then all of your investment is taxable. This means that you will have to pay your standard taxes when you withdraw the money; this amount will be based on your current tax bracket.

In addition, the IRS charges a 10% penalty for surrendering your annuity that applies to the entire amount of the investment, regardless if you invested with before or after tax money.

If your investment is made with after tax money, then your fees will be considerably lower. That is because the government can’t tax you twice on the same money, which means that only your gains will be taxable, with the exception of the penalty tax.

Cheap Annuities: Benefits

There are two major benefits when you invest in annuities. If you choose a fixed annuity, you have guaranteed income for your contracted period. You can also choose a one time payment of your befits for your deferred annuity, if you choose.

The other benefit is that the taxes are deferred until you withdraw your money. If you accept annuity payments, then you only pay taxes on the received benefits and not the total amount in your annuity account.

In addition, this allows your money to grow faster because you don’t have to take taxes out of your investment. This means that your money still works for you until you start receiving your payments.

With all that being said, you want to save the most money possible on your annuity investment. Cheap annuities are best found by comparing prices. You can do this by using a quote tool that compares the costs of different annuities from different companies.

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