Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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An annuity is one of the safest investments there is, but consumers need to understand what they are buying so that they can make an informed choice.

This financial product can offer a lifetime income on your savings, which makes it very attractive to people who are concerned they may outlive their money.

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What prospective annuity buyers need to keep in mind is that the amount they will receive from the annuity is tied to how well the insurance company holding it performs. Insurance companies also charge fees on annuities, and this needs to be factored in as well.

What is an annuity?

An annuity can be part of a retirement strategy. A person will deposit a lump sum of money with an insurance company. In return the insurer pays out a certain amount to the annuitant on a regular basis. The payments can be made monthly, quarterly or annually. Funds from the annuity can even be withdrawn in a lump sum.

There are many types of annuities available, and some customers choose to receive the money over a set number of years. Another option is for the insurance company to make payments on the annuity for life. The amount of money the annuitant receives depends on the amount of the initial deposit, as well as how the annuity is structured.

Some people choose a plan offering a fixed rate on their investment. Those willing to assume a higher degree of risk can opt for a variable rate annuity. This option links the amount of the payout to how well the funds do when invested by the insurance company.

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Rate of Return on Annuities

A person who buys an annuity needs to understand that, depending on the type of annuity, the value of their investment may rise and fall based on the performance of the market. A customer who wants a guarantee that their annuity will pay at least a set amount back will need to pay an extra fee to the insurer for this protection. As long as the insurance company remains solvent, the annuity is safe.

Before investing in an annuity, you will need to consider your needs and goals carefully so that you know what kind of plan will work best for you. It’s important to do your homework and research the insurance companies you are considering carefully as well.

You want to find out what the company’s financial rating is. Moodys or Standard and Poor’s are rating companies that provide information about an insurance company’s financial health. Through their rating systems, you will have an idea of whether the company is sound and if you should trust your savings to it.

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Find Out About Fees

Part of the process in researching annuities is to find out what fees the insurance company will charge you to invest your money with them. Be sure to ask about all the fees involved before you commit to buy so that you can make an informed choice. You may be asked to pay insurance charges and investment fees as part of this process. These costs alone can shave two or three percent off your investment, and that’s before it’s actually invested in any type of vehicle.

The insurance company will let you cash out your annuity, but be prepared to pay handsomely for the privilege. You would be looking at up to 15% in surrender fees in that case.

If you have decided that you want to invest in an annuity, take the savvy approach and divide up your funds between two or three insurance providers. You don’t want to put all your financial eggs in one basket, in case your investment doesn’t perform as well as you had hoped. In the unlikely event that one insurance company gets into financial trouble, the other ones may not have the same kinds of issues.

In any event, stick to insurance providers with an “A” rating or better for financial stability. The state where you live will have a guaranteed level of protection for people who invest in annuities, and you will want to make sure that your annuity funds stay below the cut off. That way, even if the worst happens, you will still be covered.

An annuity can be an important part of your retirement plan. This option provides you with a regular income, and you can opt to receive money for life if you wish. The money invested in an annuity grows on a tax-free basis until it’s withdrawn, which also makes it an attractive option. If you choose the insurance company carefully, this can be a safe investment vehicle for you.

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