Annuities can be confusing, but it’s important to understand the different types, so you can pick the right one for your needs. These articles will help you decide if a fixed or variable annuity is the best choice, and provide tips on how to find the best annuity company.
1. Fixed Annuities
Some people want to make sure their money is safe, but still, have the opportunity for some growth. Fixed annuities are great for these types of investors who are looking for a guarantee that their principal will be returned to them when the investment matures. These accounts typically pay interest at an agreed-upon rate at regular intervals, so you have to compare annuity rates to other investment returns to see if it’s worthwhile. When you do this, you can see that you’re not going to get great rates on your fixed annuities. If you’re looking for a low-risk investment, this is probably the right choice for you.
2. Variable Annuities
Variable annuities are designed for people who want to take on more risk to possibly get better returns. As the owner of a variable annuity, you can usually choose how you wish your money to be invested (stocks, bonds, CDs) and choose from several mutual fund options. This provides you with the chance to potentially make more money, but it’s also possible that you will lose your investment too.
The biggest benefit that variable annuities offer is tax sheltering. When you withdraw funds from a variable annuity, only a portion will be taxed as income, while the rest of the amount will be taxed as capital gains. If you don’t need your money shortly, this is a great choice for you because it allows your money to grow faster than fixed annuities and protects some of your earnings from taxes. Variable annuities also offer more flexibility than fixed annuities because of the wide range of mutual fund choices available.
3. Immediate Annuity
An immediate annuity is a contract between you and an insurance company where they pay out a regular income stream at regular intervals for the rest of your life (or certain other period chosen by you). You can get these payments even if you die, which makes it very similar to term life insurance (and since there’s no cash value like whole life insurance, it’s much cheaper). Some people prefer using an immediate annuity instead of purchasing term life insurance because it can provide them with a higher income stream and doesn’t require monthly premiums.
4. Flexible Premium Payments Annuities
Flexible premium payments annuities are good for people who want to use their money but still be able to withdraw it if they need to. These accounts allow you to take out your contributions (but not the earnings) set up as an annuity payment, penalty-free. Since withdrawals from this type of account aren’t subject to early withdrawal penalties, it’s often used for estate planning purposes, so you can transfer wealth without having to pay taxes on it or leave behind a large taxable estate. This makes fixed annuities more complicated than other types of insurance because there are many different kinds of flexible premium payment annuities.
5. Longevity Annuities
Longevity annuities provide you with a stream of income that only pays out once you have reached a certain age, usually 85 or older. This makes it very similar to immediate annuities because the payout from longevity annuities doesn’t start until about 10-20 years after you purchase them (which is why calculators exist). If you’re already in retirement and don’t need the money yet, this can be an attractive option because it allows for tax-free growth on any money that isn’t withdrawn and may allow you to use some of your Social Security benefits before they kick in at age 62 if your spouse buys a longevity annuity as well.
6. Annuity Advisors
While most annuity companies have a set rate, with predetermined terms and conditions, there is a niche in the industry that focuses on bringing buyers and sellers together to create mutually beneficial annuities. Annuity advisors typically charge a fee for their services, but it’s usually something that you can use as an upfront tax deduction because they are offering professional advice to assist in maximizing your returns. Since these types of companies don’t sell annuities themselves, they typically have access to more options from many different insurance carriers.
7. Picking The Right Annuity For You
Surprisingly, purchasing an annuity is not a complicated process (if you choose fixed or variable and stay away from any of the special features we’ve mentioned). Since every person’s financial situation is different, it’s important to sit down with a financial adviser and figure out what the best option is for your needs. It doesn’t matter which type of annuity you choose (fixed or variable), as long as you go into the decision fully aware of how it works and what kind of fees are involved.
8. Estimate Your Risk Tolerance And Find The Best Annuity
Once you’ve determined what kind of annuity works best for your needs, it will come down to how much you’re willing to invest and the features that appeal the most to you. If you want all of the bells and whistles, then an annuity adviser may be able to help you get more terms in your favor. Remember that even though each type has its benefits and drawbacks, there’s no such thing as a “bad” annuity (you’ll never go broke taking money out). You want to know your risk tolerance and how much of a risk you’re willing to take. As long as you understand how an annuity works before making a purchase, it can be a great way to build up some additional savings or provide income during retirement.
When shopping for an annuity or looking at getting one through your financial advisor, keep the following questions in mind: How long do I plan to invest money into this account? What level of risk is best suited for my situation? At what age do I want the annuity to begin making payments to me? Keep in mind that annuities aren’t for everyone; however, they can be a great tool to help achieve your long-term financial goals.
