Many people consider annuities an investment. However, they are insurance contracts and agreements between you and an insurance company. They promise to pay a specific sum of money to you or another beneficiary on a certain date, possibly someone else. The amount of money an insurance company will pay is called the “annuity benefit.”
Most people have heard about the tax breaks annuities offer but are also surprised to hear those annuities do have downsides.
Here Are The 10 Facts and Myths About Annuities
Facts:
Lifetime Income
Annuities are investments that guarantee income payments for a stated amount of time. The guaranteed income may come in cash payments, an interest rate, or a combination of both. The guaranteed income is paid out in periodic payments, often monthly, but may be paid less frequently. These periodic payments may continue for the term of the annuity contract or may end sooner if a death occurs before the annuity contract expires.
Tax-Free
While many think of annuities as retirement plans, they are also great investment vehicles that pay interest over a set period. This is because they are taxed differently from other types of investments. First, annuities are taxed as a deferred compensation plan, meaning the taxes are generally applied when the annuity is paid out. Second, the tax-deferred nature of an annuity gives it a leg up on other types of investments since capital gains are only taxed when sold rather than earned. This also means the earnings on an annuity can grow tax-free.
Some Annuities Continue Even After the Beneficiary Died
When living in retirement, you often receive payments from your annuity, whether from an insurance company or your employer. However, not all payments end when the retiree passes away. Some annuities allow payments to continue in beneficiaries’ names.
There Are Different Types of Annuities
The financial industry offers various annuities to help people meet their financial goals. They can help you deal with several risks, including longevity and inflation. They can also offer tax-deferred growth, which can be beneficial depending on your situation. However, it is important to learn all the facts before you sign on the dotted line.
It Is Safe Even If the Insurance Close Down Its Business
Annuities are financial products, like stocks and bonds, that promise to pay a set amount at regular intervals. But they also carry some unique risks. For example, if the insurance provider goes out of business, the state guaranty association that covers the state where the company sold annuities may step in to pay out benefits.
Myths:
Annuities Are Expensive
Many have a negative view of the annuity, which is understandable considering the average payout is slightly more than 2 percent of the original amount invested. However, they can be a great tool for retirement, and they offer many benefits. While many think they are expensive, some of them are free, and the ones that do cost money are often much less expensive than other investment vehicles.
Only Good for Retirement
It’s clear by now that annuities are not a retirement vehicle. They should never be the only investment option for your retirement savings. But it’s a common misconception that they are only good for retirement. This couldn’t be further from the truth. Your twenties and thirties are the perfect time to invest in an annuity.
It Is Only Useful If the Beneficiary Is Alive
An annuity is an insurance contract in which an insurance company guarantees payments to the beneficiary for life or a fixed period. These payments are typically paid on retirement. An annuity and life insurance can provide a way to benefit loved ones after death.
Lifetime Income Is Only from Retirement Account
Annuities are financial products that assure a fixed income for life. They are also called Deferred Annuities. Life Annuity plans provide lifetime income in exchange for a premium. The plans can be structured to provide either fixed payments or variable payments. The Fixed payment plans provide a specific interest rate and a fixed number of payments. The Variable payment plans provide income that increases or decreases based on the performance of financial markets.
Annuities Are Unnecessary After Retirement
Once you hit retirement age, a guaranteed monthly income from your retirement account can seem very appealing. But they are not just for retirees. While an annuity will generate income for retirees, different annuities can have different uses.
Therefore, annuities are complex financial instruments that typically require the assistance of a financial professional. They provide guaranteed lifetime income or longevity protection and can be complex investment products with many options available. They can also be very confusing, as many of them are marketed based on half-truths and myths.