Annuities and You
By Kristi Vaughan
So, you think you have the concept of diversified investing understood. What about annuities? How do they fit into your financial plan?
What are annuities?
Annuities are investment vehicles that result from a contract between you and an insurance company. You give the insurance company a certain amount of money and the insurance company agrees to make periodic payments to you beginning at a specified time. These payments can be for a certain period of time or they can continue for your lifetime, depending on the contract you have signed.
There are two types of annuities, fixed and variable. Fixed annuities provide a fixed amount of income on a regular schedule. With variable annuities, your premium is spread among different investment vehicles that can go up or down with the market. As such, your payments also can vary.
Annuities and retirement planning
Annuities differ from other long-term retirement investments in that you do not need to meet income qualifications to benefit from the advantages of tax-deferred growth. This means you can invest in an annuity even if you already have a retirement plan at work or you don’t work at all. So too, can you invest in an annuity with money you inherit.
Annuities have other differences as well, including no caps on how much you can invest and guaranteed death benefits – which assures that your beneficiaries will receive at least what you have put in minus any amount already paid to you.
And, unlike IRAs or qualified employer-sponsored retirement plans, you can determine when you want to start taking payments. You don’t have to wait until you are a certain age.
Purchasing annuities
The American Council of Life Insurers suggests that before you buy any annuity you first participate in whatever retirement plan is offered through your employer. Use the additional savings you’ve designated for retirement to purchase the annuity.
Before purchasing the annuity talk with your financial advisor about whether a fixed or variable annuity better suits your needs. You also will want to discuss payout methods and how the different options fit in with your retirement planning.
Lastly, make sure you understand the annuity contract. Ask questions until you are comfortable with your understanding of the issue.
The National Association for Variable Annuities additionally recommends that you investigate the investment portfolios offered by different annuity contracts and that you find one that best fits your investment style.
