An annuity is a type of life insurance that provides periodic income benefits for a set period of time or throughout your life. Annuities are considered long-term investments. They can allow you to save money tax-free or provide you with immediate retirement income, and they protect you from outliving your assets. There are several types; some offer a guaranteed fixed income, while others invest in the stock market and offer a variable income.
Variable annuities are mutual funds that invest in stocks, bonds, and money market instruments. Both have advantages and disadvantages. Annuities can be a good investment, but they are not for everyone.
The Insurance Information Institute recommends five questions to ask yourself before purchasing an annuity.
5 Annuity Questions to Consider
- Am I aware of the risks associated with this annuity? Some are guaranteed, while others are not.
- Do I have any emergency savings? An annuity is not for you if you do not have extra cash on hand for an emergency.
- How much will I be charged if I withdraw my investment early? That is determined by the annuity. Look around because they all have different fees and early withdrawal penalties.
- What happens to the money if I pass away? There are numerous options available. Some continue to pay beneficiaries, while others do not. You’ll want to know before making a purchase.
- Am I confident that this annuity is appropriate for someone my age, health, and financial situation?
Variable annuities are generally regulated by the Securities and Exchange Commission and state insurance commissioners. Before recommending a product, insurers must consider a variety of customer characteristics. State laws also provide for a free look period, which typically lasts 10 to 30 days and allows an annuity to be returned with no strings attached.