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Introduction to Annuities

A great way to secure a lucrative retirement income is to invest in annuities. An annuity is a type of investment that accumulates value over the years and is distributed back to the holder in a series of payments, usually after retirement. Annuities are available through life insurance companies and some financial institutions. Annuities may also be withdrawn before retirement for other purposes such as college, purchasing a home, or realizing some other short-term or long-term goal.

The Accumulation Phase

Annuities can provide a steady stream of income as long as you live, and with certain payout options, you may receive much more than you paid in if you live a long life. Taxes are deferred during an annuity's growth period. This allows the funds to grow more quickly. You will only begin paying taxes on the payments received. If withdrawn early, however, there are taxes and penalties to deal with for the amount withdrawn. No tax penalty is charged if you wait until you are age 59 1/2, but you may be required to pay an early withdrawal penalty to the insurer. During the accumulation phase, your premium will earn interest at the rate established by the company.

Types of Annuities

There are several types of annuities to consider. Single-Premium annuities require the entire investment up front, usually with a minimum investment of $5,000 or $10,000. Flexible-Premium annuities require a series of payments to fund the annuity. Immediate annuities require payment of a single premium, but payout starts immediately after the annuity has been funded. Many retirees buy this type of annuity with their saved retirement funds. Deferred annuities can be funded with a flexible or single premium, and payments begin many years later. These are often used as a long-term investment avenue.

There are also Fixed and Variable annuities. With a Fixed annuity, your funds are invested into more conservative investments such as bonds. The principal is guaranteed and the interest rate is guaranteed for a certain period of time. Variable annuities are considered to be more risky than the Fixed annuity, but you can choose how your funds are invested, such as in stocks or bonds. Variable annuities offer no guarantees for your principal or interest.

The Distribution Phase

Annuities can be distributed or paid back to you in a number of ways. Most companies will allow you to choose a distribution method. Choosing to receive a Fixed Amount will provide you with a fixed monthly income that will continue until the annuity runs out. A Fixed Period option gives you a fixed amount for a chosen period of time. A Lifetime or Straight Life option gives you payments until you die, and no payments are given to survivors. You can receive the highest monthly benefit with this option, but the risk is that you may die early. An option similar to this is the Life with Period Certain, which pays you as long as you live, but during a minimum guaranteed period to you or your beneficiary.

An Installment-Refund option allows you to receive payments as long as you live, and your beneficiary will receive the remainder of your original investment. Another option is Joint and Survivor, which allows monthly payments to be made during the joint lives of the annuitants, and the same amount (or less) will be paid to the survivor.

When selecting an annuity, be sure to weigh the pros and cons of each type of annuity and the many payout options. Choose the plan that will help you reach your long-term goals with the least amount of hassle.

by Candice Pardue

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