An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.
Main Types of Annuities
There are three main types of annuities: Fixed, Indexed and Variable. Fixed annuities have a guarantee rate of return and payments will be for a specific amount of time (e.i. 5 year, 10 year, etc.) or for a lifetime payout. Variable annuities invest your money in different investment options, typically Mutual funds. The rate of return is not guarenteed and is based on the market performance. With Indexed annuities, your retuen is based on an index (S&P 500) or other indexes. Which means you get the best of both worlds. This type of annuity has a potential to grow with the increase of the index, but also a guarantee of principal incase the index does not perform.
- Fixed Annuity
- Fixed Indexed Annuity
Reasons to Buy Annuities
They offer a unique and attractive blend of safety, growth potential, tax advantages, lifetime income, and liquidity. The top priority for most people when they are saving their money, without question, is safety.
By contract, a fixed annuity guarantees that your principal is protected and that you can get it back again, as long as you avoid any penalties for early withdrawal. Once people are satisfied that their money is safe, the next objective is to have that money grow as fast as possible. The annuity industry invented index annuities precisely so that they could offer even better rates of interest under certain conditions. People want their money to grow as fast as possible, and besides having a high rate of growth, having some sort of tax advantage helps to accomplish that goal.
Some people buy annuities for their tax deferral. Annuities typically offer a variety of options to pay the value of the contract out over time as a guaranteed periodic amount of income. Payment options often include income that is guaranteed to continue for the rest of your life, no matter how long you live.
Most people recognize that liquidity, safety, and growth do not co-exist very well, so if an annuity is going to give you guarantees of safety and the potential for a good rate of growth, there needs to be some sacrifice in liquidity. The good news is that most annuity products build in enough liquidity options to make many customers comfortable.
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