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An FYI About Immediate & Deferred Annuities

We’re going back to basics here with annuity products because the more I talk to people, the more I realize how little people know about them.  In an article published in The Daytona Beach News-Journal, David D. Holland informs the public about this $200 billion a year annuity industry.  “What investors should know about annuities” points out the same thing I have seen in talking with the general public.  Both investors and even financial advisors are often unfamiliar with annuity products and think they are very complicated.  With some basic information, most annuities are quite understandable and a great vehicle for financing retirement.

He defines an annuity simply as a product that pays out fixed monthly income payments over either one’s lifetime or a certain time frame.  This most basic type of annuity is an immediate annuity, but there is also a deferred annuity choice where you can purchase your annuity now and wait to receive payments until some point in the future.  One of the things of which people are unaware is that there are multiple types of annuities and multiple investment choices when it comes to these products.  There are hundreds of different annuities in the market and well more companies selling them, so you can almost always find an annuity that works with your future goals.

Immediate annuities, the most basic form, were invented as kind of an opposite to life insurance.  Instead of protecting your family in the event that you die sooner than expected, you are insuring yourself in case you live longer than you may have thought.  Particularly in the case that you live longer than your savings will cover.  Once you pay a lump sum of money to an insurance company, you will receive lifetime income payments to meet your living expenses.  These so-called “do it yourself” pensions are very similar to what a company does to pay out the pensions that they have promised their employees.  Your monthly income payments are based on your age, gender, how much money you put in, your life expectancy, whether the payments will last over your life or both you and your spouse’s life, and whether you have opted for a period certain or refund option to provide death benefits to your heirs.

Soon after immediate annuities were introduced, insurance companies brought about deferred annuities to give clients more options.  With a deferred annuity, you can make multiple payments into the account balance rather than just one lump sum payment.  The thee main types of deferred annuities are fixed annuities, variable annuities, and indexed annuities.  You can find much more detailed information throughout our site, but here are some basics.  Fixed annuity rates are set and are competitive with bank CDs.  Your principal and interest rate are guaranteed with a fixed annuity, so you don’t have to worry about running out of money in retirement.  Your money is usually invested in real estate, bonds, and mortgages by the insurance company.

Indexed annuities are also known as fixed indexed annuities and equity indexed annuities.  These products are much like fixed annuities because of their guarantees, but their interest is earned in a different way.  Some of your money is invested in stocks to give you the potential for greater returns.  While you won’t have to worry about negative returns in the stock market with indexed annuities, you also have the potential to earn zero returns without any kind of guaranteed rate.  Variable annuities are not only an insurance product, but they are also a security because their value increases and decreases.  The insurance company invests funds into multiple subaccounts that can cause large gains or losses for investors.  One of the biggest draws of these and other deferred annuities is that they are tax deferred until you start receiving your payouts.

I hope these basic annuity facts are helpful to you when you are researching ways to finance your retirement.  Don’t hesitate to contact an Annuity FYI expert to get more detailed information about all the different types of annuities.  Just don’t be scared of the products based on misconceptions.  An immediate or deferred annuity just might be the right investment for your future income planning.

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