Annuities

Let’s talk about annuities…

What is an Annuity?

An annuity is an insurance contract that exchanges present contributions for future income payments by providing you with a predictable stream of income in retirement. The primary benefits of an annuity include Predictable payments, Protection and growth, Tax-deferred growth, Retirement Income, and Death benefits.

Three types of Annuities

(1) Fixed Annuity

Fixed Annuities pay you a guaranteed annual minimum, ensuring a steady stream of income from the contract each year. Based on your fixed annuity contract, you could receive more in years when the annuity company’s investments earn higher returns. Although during less profitable years, you will receive at least the guaranteed minimum amount of income.

A fixed annuity pays you a guaranteed annual minimum, ensuring you receive a baseline of income from the contract each year. Depending on the details of the annuity contract, a fixed annuity could pay you more in years when the annuity company’s investments earn higher returns. But during less profitable years, you receive at least the guaranteed minimum amount of income.

To put it another way, the guaranteed annual minimum income from a fixed annuity does not depend directly on market performance. Fixed annuities are the safest option because you know the precise minimum you will earn overtime, helping you predict your annuity income when you start taking distributions.

(2) Variable Annuity

With a variable annuity, your income payments depend on market performance. You choose a selection of investments, typically mutual funds that hold stocks, bonds and money market instruments. The amount of money paid out to you is determined by the performance of these investments, after expenses.

You take on more risk with a variable annuity, but you also get more upside from the investments. If your investments do well, your annuity balance will grow more quickly and your future payments will be larger. On the other hand, if your investments do poorly, your balance will grow less quickly and could even lose value, reducing your future payments.

(3) Indexed Annuity

Earnings from an indexed annuity come from the performance of a market index. Your annual return is calculated over the course of a specified period such as a year. If the index gains value, the value of your index annuity increases, but could also lose value when the index declines. The main potential for volatility is the main feature of an indexed annuity. Although your gains and losses are usually capped by the annuity contract.

Annuity Benefits

Annuity income payments may be guaranteed for a set period of time, until the end of your life, or passed to the life of your spouse or another beneficiary.

Your money grows while all or some of it also stays protected from loss.

Take advantage of tax-deferred growth. Money going into the annuity grows on a tax-deferred basis. Later when you receive the annuity payments, the earning portion of your payments is taxed as ordinary income while the principal is essentially free of tax.

You want to turn your savings money into a regular paycheck for a specified number of years or even for life.

Looking to leave a legacy to your loved ones. Depending on the type of annuity you choose, you will be able to name a beneficiary who can receive payments after you pass away.

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