An annuity is a contract in which an individual agrees to pay premiums to an insurance company and receives, in exchange, a regular stream of income payments from the issuer either now or at some time in the future. Unlike many financial products available, an annuity can provide an income you can't outlive.
The Main Benefits of Annuity Investing
A Guaranteed Death Benefit: Generally, annuities also offer a death benefit. While the types of death benefits differ between products, annuities allow you to pass the proceeds of the contract directly to a named beneficiary, avoiding the delay and expense of probate.
Tax-Deferred Growth: An annuity is a long-term financial product where interest accumulates tax-deferred. Because you do not pay taxes on annuity assets until you access the proceeds in your contract, your money grows tax-deferred. As a result, you may be able to accumulate more money than a traditional taxable investment earning the same rate of return.
How an Annuity Works
The duration of an annuity can be broken down into two phases: The accumulation phase and the annuitization phase.
Accumulation Phase: During this phase, earnings on the contract accumulate tax-deferred. Depending upon the type of annuity purchased, it may be possible to add additional premiums during this phase.
Annuitization: In this phase, the annuitant chooses a payout option and begins receiving income. Typical annuity payment options include payouts for one's lifetime, or for a specified number of years. Once the payout option has been chosen, it cannot be changed, nor can premium be added after the payout period begins.
Types of Annuities
Depending upon financial goals, need for income, and other considerations, individuals may choose an immediate annuity or a deferred annuity.
Deferred Annuity: Unlike an immediate annuity, a deferred annuity allows you to postpone (defer) the start of your income payments until a time in the future that you choose. A deferred annuity is primarily designed to accumulate assets for long-term financial goals.
Fixed Indexed Annuity: Equity indexed annuities provide the potential to outperform traditional fixed rate annuities and avoid the downside risk of investing in the stock market. That is because interest credited to equity indexed annuities is linked to increases in commonly used indices such as the S&P 500®, and this interest is guaranteed to never fall below zero. The result is the potential for higher stock market-linked returns without any downside risk.
Fixed Annuity: You are credited a fixed interest rate that typically does not fluctuate over the duration of your contract.
Immediate Annuity: This type of annuity is designed to make payments to you shortly after your lump-sum premium payment is made. The income stream is paid periodically from the premium payment and accumulated interest earned on that premium.
Taxable distributions (and certain deemed distributions) are subject to ordinary income tax and if taken prior to age 59 1/2, may also be subject to a 10% federal income tax penalty. Additionally, some distributions may be subject to surrender charges if made during the surrender charge period.
Neither ECA Marketing nor its agents provide financial, tax, legal, or accounting advice. Please consult with a qualified tax advisor with regard to your individual circumstances.
If you're considering purchasing an annuity, it is important to consult with your financial professional for insight into the options and objectives which are best suited for you. Be sure to carefully review any disclosure information when making any financial decisions.