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Understanding Life Insurance And Annuities

If you’re looking for peace of mind where it comes to having sufficient funds when you reach retirement age for either yourself or your beneficiaries, you may be wondering whether an annuity offers a feasible solution.

What is an Annuity?

An annuity is purchased from your insurance company, and is essentially a savings account into which you place your money for a certain time period that you determine. Once the time period expires, there are several ways you can choose to receive or distribute the money.

Who Can Benefit From an Annuity?

Those who want to be able to secure steady retirement income are likely to choose the annuity option, as are those who wish to be able to avoid the headache of the probate process when transferring monies to their beneficiaries. Those wishing to preserve their standard of living by reducing inflation’s impact may also see annuities as a viable solution.

Three Basic Annuity Types: Fixed, Variable and Split

The fixed annuity will provide a return at a guaranteed rate one to ten years after purchase. Investments are made into high-level government securities and corporate bonds. In choosing a guaranteed return fixed annuity, you can ensure that you will receive all of the funds you invested, as there are no interest rate fluctuations. The fixed annuity allows you to defer the payment of taxes on the interest in the account until you have received money from it.

The variable annuity offers the flexibility to invest in specific funds. The money you invest goes into sub-accounts, which are connected to market rates, and so will fluctuate. Variable annuities offer three types of options for the investor: conservative investments, aggressive investments and a living benefit product. The variable annuity does present some risk, as should your investments not do as well as you’d hoped, you can lose a part or all of your investment.

The split annuity will see your money placed in two accounts. The goal of this option is to leave your original deposit unchanged, but provide you with the means to grow your funds in with the second account.

How Much an Annuity Costs

There are fees associated with the purchase of all annuities, which can add up to three percent or higher annually. These fees will include administrative expenses, mortality expenses and surrender charges. However, the surrender charge is only applicable if you cash out early or choose to cancel your annuity.

Forms of Annuity Payouts

There are several different ways you can choose to have your annuity paid to you or your beneficiaries.

The Fixed Period, or Period Certain payment will see annuity funds paid after a defined period. Should you pass away before your period expires, your beneficiary will receive payments for as many years as are left over in your annuity period.

In the case of the Life Only payment, you will receive payments for as long as you are alive. How much will depend on the length of your life expectancy. Higher life expectancies will see smaller payments. But if you outlive your life expectancy, more money could be received.

The Lump Sum Payment is just that. However, instead of paying a lower tax amount per payment that you receive, the lump sum option will require that you pay tax on all that your investment earned at once.

Guaranteed Term offers lifetime income, as well as the option to choose a period for which you are guaranteed a return, forcing payment to your beneficiaries or estate even if you should pass away before the term expires.

Being informed about the many options available to you for annuities can be overwhelming if this is your first time considering them. But discussing your options with your insurance company can be a great way to get the clarification you need to make an informed decision.

Featured images:
  • License: Royalty Free or iStock source: http://www.sxc.hu/photo/1388612

Guest author Adam Foley writes on a variety of topics related to the life insurance industry, and recommends The State Insurance Guide in order to plan for your future.

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