What are Annuities?
Starting from the basic idea leading to details, this article will explain the concept of Annuities to everyone. Annuities are basically insurance contracts that will provide a fixed stream for your whole life or for a specified period of time. Moreover, one can purchase an annuity either paying the price at once or can get it into the form of installments or they can even start paying once they get their first annuity. Mostly, people use an annuity to fund their retirement after their job is over and they do not have any other way of living.
However, getting into the further details, let me give you another short information about annuities. These are long-term plans and people pursue them to get benefits after a long time instead of few years. People who have targets like security or retirement funding, diversification, and principal preservation go for annuities. Let’s focus on the working of the annuities first.
How do Annuities work?
The working of annuities starts by converting lump-sum money into a stream of income that a person can use anytime they want. This concept is for the people who do not have any kind of business to fund their living. These people need more than just social security setup but some cash that keeps coming in their accounts every month or year. Once paid, these annuities will keep on generating as long as the person is living.
In essence, when you buy a deferred annuity, you pay a premium to the insurance company. That initial investment will grow tax-deferred throughout the accumulation phase, typically anywhere from ten to 30 years, depending on the terms of the contract. Once the distribution phase begins based on the terms of the contract, you will start receiving regular payments.
However, the best thing about an annuity is that you are free and away from the risk of a market crash. No matter what goes around in the market, your money and annuity are always safe and you can get it every month at the same time. Furthermore, you will have to pay some extra money apart from your annuity installments. This extra money goes to investment management, contract riders, administrative services, etc.
Configuration of Annuities
Annuities come in two configurations, one is immediate and the other is deferred. The immediate annuities have a single lump-sum payment, provide guaranteed monthly payouts and supplement the retirement saving of the person.
While on the other hand, deferred annuities have a tax-deferred premium growth. It begins on the very exact date which you will specify in the form and it offers more money later once you are retired. But it all matters what are your financial goals because they will decide what kind of annuity will suit you best.
Types of Annuities Near San Diego
There are different types of Annuities and people can choose according to their requirements. Moreover, the personal goals and objectives decide the type of annuity that a person would choose. Let’s have a look at different annuities.
These kinds of annuities come with a set rate of interest for a set period of time and this rate might fluctuate with every year. This annuity is backed by the insurance company. Fixed annuities are lower risk than variable annuities, which determine interest rates depending on the performance of the underlying investments. They are simple and straight-forward and can provide the most predictable and reliable income stream with low fees.
Fixed Indexed Annuities
These annuities are not regular ones but they are connected with the stocks. The payments of these annuities go according to the value of the stock with whom they are tied. But there is one thing that is good about them and that is the guaranteed minimum return. This means you will receive at least a certain minimum amount of sum. But if your stocks perform better, then this can go way up to higher than the usual amount.
This annuity is all about profit and gain. You will not receive any minimum payment even if your stock did not perform. However, if it has performs well, then you will get more than just the mere interest value. Just like Fixed Indexed Annuities, it is also tied with the stock values or interests.
Why you should go for buying an Annuity?
There are multiple reasons for this because this is a long-term project which can help you in fulfilling your need once get old and get retirement from your job. But let’s have a look at the most important reasons.
- Tax-deferred growth.
- Principal Protection
- Inflation Adjustment
- Death Benefits for heirs
- Long-term Security
- Probate-free estate distribution
Benefits of Annuity
Annuity comes with various benefits, such as it helps the investor to save money without t paying taxes on the interest until a later date. Secondly, they do not have any kind of contribution limits. Moreover, it creates a stream of predictable income stream to fund retirement. With an annuity, you don’t have to worry about outliving your savings. This is a major advantage in the post-pension age.
Disadvantage of Annuities
Not everything has all the benefits, there is always a darker side but in the case of annuities, this dark side is not that dark. Basically, some consumers feel that sacrificing liquidity in return for lifetime financial security is a disadvantage. This is understandable for such cases where people are low on cash in hand and for the annuity is not the right option. It wouldn’t make financial sense to purchase a valuable, viable product if it’s not valuable and viable for you.
However, there are many other common concerns of people about annuities such as complexity of it, conservative returns in some types, and loss of potential returns. Moreover, some investors also feel that commissions and fees are not worth paying and a waste of their money.
For many investors, the main objection to annuities is the risk of losing access to their money for the length of their contract. This means that in addition to the possibility that you won’t be able to cover unexpected expenses, you may miss the opportunity to take advantage of higher interest rates or to invest in the stock market. This is the time where you decide about the long-term goals and you have the ultimate decision to buy or sell an annuity. Because this annuity is linked with your goals and the sum you will use after retirement.