An annuity is an insurance product or form of investment that involves a payment to someone monthly or in one lump sum. At its core, an annuity is a simple financial contract; it takes your investment and creates an income stream. However, there are many varieties and options that can make it quite complex. And although they may seem similar, an annuity is different from life insurance. While both include death benefits, consumers purchase life insurance in the event or preparation for death. Consumers purchase an annuity to financially sustain a long life. So, is an annuity worth investing in? We’ll cover the benefits, drawbacks, and how annuities work.
Is An Annuity Worth Investing In?
Structure
You can opt for a fixed, variable, deferred, or immediate annuity.
A fixed annuity pays a certain amount of money each month, which is based on the total amount of the initial investment. A variable annuity pays out an amount that changes monthly depending on how that initial investment is performing. Some variable annuities will offer guarantees that the monthly payment won’t drop below a certain amount of money even if the initial investment is completely depleted.
After you decide on a fixed or variable annuity, you need to decide when the payments will begin: either immediately or allow your investment to grow in the market and choose a deferred annuity. There’s no right answer in this scenario, but it’s best to discuss which would benefit you most from some financial counseling from a professional. You can also decide to withdraw your investment, but there is often a surrender charge with both forms of an annuity.
Advantages
Annuities have many of the same tax advantages that are associated with a 401(k) or IRA. For one, you won’t owe income taxes on your investment in an annuity. And you won’t have to pay taxes on the gains generated. Although once you start receiving payments, they will be taxed as normal income. You are also able to choose the time span to receive payments. So depending on your situation, you may receive payments for a set length of time or the rest of your life. And one of the most intriguing features of an annuity is that there is no contribution limit. This means you’re able to put in as much as you can.
Disadvantages
Annuities are notorious for charging high fees and having a lot of them. If it’s sold by a broker or salesperson, there could be a hefty commission to pay. Other charges include a surrender charge if you cancel the annuity within the first few years. And for variable annuities, there are annual fees of up to two percent. If you withdraw early, there’s a 10 percent penalty. If the company who sold the annuity goes under, you could lose it all. Now, that’s not to say it’s not worth the fees, but there wouldn’t be nearly as many fees if you just invest in a mutual fund.
Annuities are not for everyone, but they can certainly suit the right person in the right situation. An annuity is especially tempting if you’re concerned about running out of money once you’ve retired. Consult your financial planner about your situation and with strong guidance, you’ll make the right decision.
Author Bio: Amanda Shaffer is a writer, marketer, and colleague with some expert financial planners at Allgen Financial. She has worked in the digital marketing realm for the better part of a decade, and in finance for the last five years, specializing in content development, web design, and SEO. When not at her computer, she can be found rock climbing in Costa Rica, wandering the hills of the Himalayas, or hanging at the beach with her furry companions.
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