Tips to understanding annuities

Understanding Different Types of Annuities

Tips to understanding annuities


Why do many consumers run from the talk of annuities? Because many do not know what they are and the industry makes them more complicated than necessary.

According to McGill Life Insurance, 8th edition, the term annuity is derived from the Latin word annus, meaning year, and defines an annual payment. Simply an annuity is a periodic payment to stop at a specific time or date but continue throughout a fixed period. The income paid out may be received annually, semiannually, quarterly and monthly. It depends on the agreement and most choose a monthly payment.

If payments are made through a lifetime, this is called a life annuity. Its purpose is to liquidate a specific sum. So if income is needed at a later time, an annuity can fill in the blanks. An annuity is based on generating income and an accumulated amount which is to be liquidated over a period of years. And annuities can be unpredictable simply because we are taking a guess on our life expectancy. That is not the best in retirement plan options.

Single life annuities are the most common but you can also have joint. But if one of the partners dies, the annuity will cease to pay out. Annuities are categorized by the following:

– If the contract calls for monthly payments, the first one is due a month after the purchase to be considered an immediate annuity.

Deferred means that you are accumulating funds over a period of time to reach the amount necessary to provide benefits promised.

Variable is used to purchase different mutual funds within an insurance contract. Even if you invest in mutual funds that are not doing well, you never get back less than what you originally deposited. But there are no guarantees to what you can accumulate.

– Fairly new, the index annuity is dependent on the market and different types exist. As the market goes up and down, with some index types, your money can go up but cannot go down.

Annuities do carry state taxes which vary from state to state. This is something to look into when buying an annuity and an area that people have complained about since many agents really do not know about this fee. Also, annuities are not built to pass on to children when you die. They inherit the money and if they withdraw, they will owe income taxes along with other fees. One of the reasons consumers are scared of annuities as far as leaving a legacy, are the costs that their dependents may have to pay.

The important lesson to be learned on annuities is being advised by a strong, legitimate financial counselor because one-size packages never fit all scenarios. It all depends on a variety of circumstances that make you unique and it is essential to have a financial adviser that really pays attention to the best for you and your family in the long run. Want to learn more about annuities? Visit our article, What is an Annuity? 

Leave a comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.