Annuity Insurance
To protect them against longevity and help them save for retirement, more and more Americans are choosing the safety of annuities. This
insurance investment tool brings peace of mind to retirees by offering them (1) favorable tax treatment, (2) a guaranteed income for life, (3) a secure investment, (4) the opportunity to plan for their future, and (5) the ability to achieve long-term financial objectives. A life insurance annuity is a contract between a consumer and an insurer whereby the former pays the principal by way of a series of payments or a lump sum. In exchange, the annuity company agrees to issue fixed or variable, periodic payments to the insured for a stipulated period- either immediately or at a future date. Policyholders may fund the life annuity through fixed or variable installments or in a lump sum.
An annuity typically offers tax-free growth of retirement earnings until its owner withdraws funds. Upon issuing the policy, the provider sets the first year annuity rate, known as the current rate, which remains the same for the first year. In the second and subsequent years, the insurer sets its renewal rate or base rate, which is not guaranteed. Some of the choices offered by annuity insurance companies include guaranteed payments for the life of the insured or that of his or her beneficiary and guaranteed death benefits. Almost every annuity plan provides for a death benefit, in which the insurer promises that upon the policyholder's death, all of his or her premiums will be paid to the beneficiaries.
There are no contribution restrictions for annuities; the insured may invest in them as much as they wish. Purchasers of annuity insurance must make the following three choices:
1. Decide Upon The Timing Of The Payout
Applicants will have to decide whether to receive the income immediately or have them deferred. With an immediate annuity or a single premium immediate annuity (SPIA), in which income is invested for short-term gain, consumers are issued the payments immediately after purchasing them. They may either choose 1) a fixed period, with payments combining both interest and principal, 2) a fixed, steady income, or 3) a variable income stream that hinges upon market performance. With a single premium deferred annuity (SPDA), in which the income is invested for long-term growth that is tax-deferred, investors are issued payments at a future date of their own choosing- typically at retirement.
2. Choose The Investment Type
There are two categories of annuities- variable and fixed.
Fixed Annuity. In a fixed annuity, the issuer guarantees that the policyholder will receive a set monthly amount for a specific period of time and a minimum interest rate while his or her account is growing. Fixed annuities, which are invested mainly in corporate bonds and low-risk government securities, offer guaranteed annuity rates on earnings, usually for a term of one to fifteen years. Periodic payments may continue indefinitely (i.e. insured's lifetime or lifetime of investor's spouse) or for a finite period (i.e. 15 years).
Variable Annuity. Variable annuities consist of insurance coupled with an investment product featuring tax-deferred savings. Consumers may invest their variable annuity premiums by choosing from a wide range of investment options, such as mutual funds, guaranteed fixed accounts, money market securities, stocks, bonds, and securities portfolios. Some annuity companies offer dozens of investment options with as many as ten or more different managers and authorize investors to transfer from one to the other at no cost and tax-free. The market performance of the selected investment funds will determine the rate of return and the amount of payments that the investor receives. Variable annuities do not have a pre-set rate of return and typically boast higher earnings than do fixed annuities.
The investment product and annuity insurance contract boast the following benefits:
- Tax-deferred gains from the underlying investments
- Opportunity to name beneficiaries as recipients of the account's outstanding balance upon the insured's death;
- Ability to earn income for the duration of the recipient's life; and
- Guarantees spelled out in the insurance document.
3. Selecting The Form Of Liquidity Purchasers must also decide whether a liquidity option with or without withdrawal penalties is more congruent with their needs. The majority of annuities are "no-surrender" policies, which means that the insured may withdraw either up to 15% annually or their interest earnings without a penalty. Policy owners of such annuities are not charged for early withdrawal. The average life insurance annuity does, however, have a surrender charge penalizing policyholders who make early withdrawals that exceed the free withdrawal sum. The good news is that some annuities that carry surrender charges extend a bonus to investors by tacking on an average of 3-5% to the principal.
Instead of contacting numerous brokerages and agents, consumers may comparison-shop with online
insurance quotes for the highest fixed annuity rates from an extensive number of insurance companies. Finally, before purchasing annuity insurance, prospective investors should verify the insurer's financial strength.
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