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| What Is Annuty ? | |
| You may have heard of the term “annuity” but are not really sure what it entails. Basically, annuities are a contract that exists between an individual and an insurance company, and they have existed for more than 200 years. You make contributions that may consist of a series of payments or a lump sum payment. In return, the insurer will guarantee to provide you with periodic payments that can begin at a certain date in the future or immediately. In most cases, your insurer will pay you four times a year (quarterly), two times a year (biannually) or once a year (annually). One of the main differences from life insurance is the fact that you will not have to undergo a physical examination to purchase an annuity. Another difference is that annuities are used to fund individuals for their entire lifetime instead of leaving money to a surviving spouse or children. Annuities are very similar to bank certificates of deposit (CDs) offered by financial institutions, as they both provide you with a safe, guaranteed rate of return based on interest rates. However, annuities generally offer greater liquidity, tax-deferral benefits and higher returns than CDs. | |
| Fixed Annuity | |
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If you purchase a fixed annuity, your insurance provider will provide you with a minimum rate of interest and a guaranteed dollar amount for periodic payments while your account grows. You can choose whether to purchase an annuity with an indefinite time period such as the rest of your life or your spouse or a specific time period such as 10 or 20 years. Fixed annuities are safer because they will guarantee you a specific amount of money for each payment you receive. The disadvantage is that you will continue to receive the same amount for your annuity payments even if the market ends up improving. Just like there are two categories of annuities, immediate and deferred, there are also three main types. The first is called a fixed annuity, and it means that you will receive a guaranteed minimum interest rate when you sign an annuity contract with your insurance company. Some insurers will guarantee the interest rate for one or several years, during which time your fixed annuity will earn compound interest. |
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| Variable Annuity | |
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The payments you receive for a variable annuity will differ, depending on the performance of your investment. The advantage is that you can earn more money than a fixed annuity. The disadvantage of a variable annuity is that you can also end up receiving much lower payments if the market suffers a downturn. You can talk to your financial planner or insurance company to determine which option is better for you and your spouse. Couples often decide to purchase a fixed annuity as well as a variable annuity. On the other hand, many single individuals choose to purchase a fixed annuity to provide them with their sole source of retirement income. Just like its name implies, you have the option of investing your purchase payments in different areas when you purchase a variable annuity. The sub-accounts for most variable annuity contracts are normally managed by professional investment managers as segregated investment accounts or as mutual funds. Most people choose to invest in mutual funds. The amount of the payments you end up receiving will vary. It all depends on how well the investments you have chosen for your variable annuity perform. This makes a variable annuity very similar to a mutual fund; you can decide whether to invest your hard-earned money in money markets, bonds, stocks or other funding options. One disadvantage to variable annuities is that your funds will not be guaranteed by your insurance provider. Therefore, you may earn much lower returns or lose your principal if the market suffers a downturn. This will depend on the type of funding account you select. However, certain plans provide a fixed interest rate, which means that your interest on any money you invest and your principal are guaranteed. Unlike fixed annuities, variable annuities are regulated by the U.S. Securities and Exchange Commission (SEC). They are great choices if you want to take advantage of any potential market growth, enjoy tax-deferral benefits, and have a significant amount of assets to invest for at least 10 years until you retire. In addition, you won’t have to pay any taxes on gains earned by a variable annuity until you decide to withdraw the funds. That is why many people choose to withdraw their money when they retire. Another advantage is that you can purchase most variable annuities using a flexible premium payment system. This means you won’t have to come up with a large amount up front or make a lump sum payment. Although you can usually withdraw your money, most variable annuities have penalties for withdrawing your money early. However, after a certain period of time called the surrender charge period, you may be able to withdraw your funds without paying any withdrawal or surrender charges. The amount of time varies according to your insurance company, but the typical time period is between five and ten years. The majority of insurance providers will also let you withdraw up to 10 percent of your account value annually without paying any charges. |
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| Equity Indexed Annuity | |
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An equity-indexed annuity or EIA involves a contract return that is higher than the annual minimum rate of the turn from a stock market index minus expenses. If the specific index, such as the Standard & Poor’s 500 index, increases during a certain time period, you will receive a higher return for your annuity. However, if the stock market declines, you will receive a lower minimum rate. Regardless of the market conditions, you are guaranteed to receive back at least the entire principal you paid if you retain an EIA contract for a minimum period. Over the years, one type of deferred annuity called an equity-indexed annuity has become popular. With other types of annuities, your insurance company may guarantee you a minimum interest rate. This is also the case with an equity-indexed annuity, but the main difference is how your credit interest is calculated. It is based on a formula that involves changes in the index to which your annuity is linked. This formula determines the amount of additional interest you will be credited. Therefore, your interest earnings for an equity-indexed annuity will depend on how well an accepted equity index performs. For example, some insurance companies will determine the crediting rates by using the Russell 2000, Dow Jones Industrial Average or the Standard & Poor’s 500 Index, with the latter being the most common. The method of calculating the index growth for an equity-indexed annuity also differs. Some insurance providers calculate point-to-point changes in the index, whereas others calculate averages in the index changes. You can choose to make a series of premium payments or a lump sum payment when you purchase an equity-indexed annuity. Most insurance companies will guarantee you a minimum return, but the actual rate depends on who you choose. You will receive returns that are based on the equity index changes during the accumulation period. After that period, you will receive periodic payments from your insurance provider according to the specific terms of your annuity contract. As with other types of fixed rate annuities, you can enjoy tax deferral benefits, a minimum interest rate guarantee and safety of your premium when you choose an equity-indexed annuity. That means that you will be sure to receive a certain rate of interest, regardless of how the Index performs. You can normally withdraw your money from this type of annuity, although you will have to pay what are called surrender charges for an initial period. The actual time period varies according to the insurance company, but it is normally between five and ten years of purchasing your annuity. |
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| BENEFITS OF ANNUITIES | |
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There are many advantages of purchasing annuities rather than other types of investment such as CDs or insurance policies. The main advantages are avoidance of probate, a guaranteed income for life or a set time period and annuity tax benefits. Other benefits of annuities include very low or no risk with the possibility of earning high returns and the ability to continue to increase your earnings even in a weak or volatile market. This can leave you with more money to pay for nursing home care, enjoy your retirement or leave money to a surviving spouse or children. Most individuals use annuities for their retirement planning, as they can provide you with guaranteed retirement income for your entire life and protect your retirement income from market downturns. Many people use annuities for their retirement income because they normally provide tax-deferred returns; you don’t have to pay any taxes on them until you withdraw them. When used as a part of a retirement plan, an annuity can provide you and your spouse with a stable, fixed income once you decide to stop working. |
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