An individual buys an annuity from an insurance company and pays a lump sum or a series of payments over time. In return, the insurance company guarantees that the funds will grow at a tax-free rate. The earnings rate may be guaranteed for a period of time in a fixed account annuity.
In a variable annuity, the account value fluctuates based on the performance of the portfolio. The portfolio of the annuity can be shifted between fixed investments or various common stock portfolios or separate accounts.
Starting at the date of the distribution, if the investor chose the life annuity options, they may be able to take distributions for the remainder of their life.
The size of the payment is determined by the account value at the time of distribution, and the duration of the payment period. Life annuity payments will generally be smaller than would the equivalent fixed period payments.
If you select the right options and riders on the annuity contract, you may even be able to specify that the payments continue after you pass away. The payments may continue to other members of your family, but these additions often come in the form of higher premium payments.
It is important that you careful evaluate each of the different characteristics and expenses of a variable annuity account before you commit to investing. Your contract data will have this information and will inform you of anything that you need to know before investing. If something doesn't seem right with the contract, make sure that you have it sufficiently answered before you commit to purchase the annuity.
Because the earned income is not taxed until you begin withdrawing the money (presumably at a much lower tax rate), your funds accumulate much faster than they would if they were taxed.
The insurance component, of course, is the guaranteed regular monthly income payment for the rest of your life, reducing the worry of your retirement income budgeting. In addition, should you die before you begin receiving payments, your heirs are guaranteed to receive the full amount of the original principal.
There are a number of things that can reduce the value of your annuity contract. Items such as loans or early withdrawals may be correlated with additional charges or expenses that would normally not occur. Be sure that you sufficiently check with the prospectus to determine that you understand the implications of all of the contract details. - 31884
In a variable annuity, the account value fluctuates based on the performance of the portfolio. The portfolio of the annuity can be shifted between fixed investments or various common stock portfolios or separate accounts.
Starting at the date of the distribution, if the investor chose the life annuity options, they may be able to take distributions for the remainder of their life.
The size of the payment is determined by the account value at the time of distribution, and the duration of the payment period. Life annuity payments will generally be smaller than would the equivalent fixed period payments.
If you select the right options and riders on the annuity contract, you may even be able to specify that the payments continue after you pass away. The payments may continue to other members of your family, but these additions often come in the form of higher premium payments.
It is important that you careful evaluate each of the different characteristics and expenses of a variable annuity account before you commit to investing. Your contract data will have this information and will inform you of anything that you need to know before investing. If something doesn't seem right with the contract, make sure that you have it sufficiently answered before you commit to purchase the annuity.
Because the earned income is not taxed until you begin withdrawing the money (presumably at a much lower tax rate), your funds accumulate much faster than they would if they were taxed.
The insurance component, of course, is the guaranteed regular monthly income payment for the rest of your life, reducing the worry of your retirement income budgeting. In addition, should you die before you begin receiving payments, your heirs are guaranteed to receive the full amount of the original principal.
There are a number of things that can reduce the value of your annuity contract. Items such as loans or early withdrawals may be correlated with additional charges or expenses that would normally not occur. Be sure that you sufficiently check with the prospectus to determine that you understand the implications of all of the contract details. - 31884
About the Author:
The world of fixed deferred annuities can be rather complicated. For more information on these insurance products, be sure to visit Luke Murray at The Fixed Annuity Guide.
