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Purpose and Benefits of an Annuity
An annuity is a long-term financial contract; it requires the person acquiring the annuity to make a series of payments over a time period to earn interest and receive the payments again in the future. The insurance company and the purchaser of the annuity mutually decide and arrange the contract according to the purchaser’s needs.
Purpose of an Annuity
The purpose of an annuity is to provide a safe income stream to the investor in later years of life. The purchaser of an annuity may make one contribution or several contributions regularly for a fixed period. After all the payments are made, the insurer is obliged to start paying the annuity back. An annuity is usually the traditional retirement plan. Social security and pension plans are examples of annuities.
There are hundreds of annuities available, which makes it very difficult to choose the right one. At Yellowbrick financial, the consultants find the best annuity options and explain everything you need to know when purchasing an annuity to make your future financially independent and worry-free.
The annuity payments are supplemented from stocks and bond portfolios generally and are payable for a lifetime as per some annuity plans for retirement. But the annuities pay more as compared to investing directly in bonds.
The payments are fixed and are to be paid on time to the retirees or purchasers of the annuity. Most people start to save in their late fifties for a retirement plan or an annuity. An annuity provides retirees with a safe income stream they can depend upon in old age.
Benefits of an Annuity:
- There are no tax payments involved when paying for the annuity. However, if you withdraw or receive the annuity repayments before the age of 60, a tax payment of 10% might be charged.
- The payment plans for an annuity are not limited. You can add as much after-tax money as you want to the annuity and there are no limitations based on your sources of income and the amount you earn.
- If the purchaser of the annuity dies before receiving any payments, the annuity is passed on to the beneficiaries regardless of the probate.
- The options for receiving payments are diverse. You can modify your annuity plan and also gain payments for the rest of your lifetime or transfer them to beneficiaries.
Guarantees
The future is uncertain and how the markets will perform tomorrow is uncertain as well. There are many guarantees an annuity can provide. With annuities, the principal is highly protected and the minimum payment is fixed. The guarantees an annuity plan may offer to include:
The Guarantee of Lifetime Withdrawals Benefit: This means that even if the contract has ended and the principal along with the accumulated interest is paid, the insurance company pays annually for a specified period, or until the purchaser lives.
Guaranteed Minimum Accumulation Benefit: A minimum account balance is held and guaranteed, even when the markets perform poorly.
Guaranteed Minimum Income Benefit: Even if the market has been performing poorly, the insurer pays a minimum income to the purchaser of the annuity at all times.
Types of Annuities
There are 5 basic types of annuities. The advantages and disadvantages of these annuities differ. Choosing the right type of annuity is important to gain the best benefit from your investment.
Yellowbrick financial consultants help people every day choose what is right for them. Expert knowledge and hands-on experience of the Yellowbrick financial consultants enable them to look at all the options carefully and determine the best annuity for the purchasers.
Here are the types of annuities:
1. Fixed Annuity
The most simple and safe type of annuity is a fixed annuity. The insurance companies fix an interest rate on payments that are accumulated regularly irrespective of change in interest rate.
The interest rates an insurance company offers are higher than a bank’s deposit while the income is also guaranteed. The retires find this option the safest and best. Also, the retiree can defer or withdraw income at times.
2. Variable Annuity
The variable annuities are dependent on how well the mutual funds perform. The purchaser of the annuity chooses subaccounts, that determine the account value. An insurance policy provision is purchased that finalizes the income stream in case of market performance fluctuations. This finalizing of the income diminishes the risk even if the subaccounts perform poorly in the future.
The variable annuity plan works best for retirees who want to earn a guaranteed lifetime profitable income through subaccounts.
3. Fixed-Indexed Annuity
A fixed index income is based on subaccounts. However, it guarantees a minimum income benefit in case of market fluctuations. The principal is protected but in case of rising stocks, the income is trimmed again. It allows the investor to play safe but the downside of the annuity is conservative participation in the potential market. The annuity is for those retirees who don’t want to take any chances as keeping pace with the robust stock market is not going to make the income higher due to the high-risk management offered by the insurer.
4. Deferred Annuity
The deferred annuity as the name suggests is deferred for a specified period. After payment of the premium, the investor waits for a specified period until the interest in accumulated on each installment.
This delay of payments can earn higher interest and increases the income on low principals. Retirees and other people often invest in a deferred annuity to generate higher income in the later period of their life. It attracts retirees and parents who plan to secure finance for their kid’s college expenses.
5. Immediate Annuity
An immediate annuity is like a life insurance policy where the purchaser of an annuity pays a lump-sum amount to receive gradual payments until death. The payments of an immediate annuity are higher than payments of other annuities and are paid to the investor until death. Once the investment is done, the investor can start receiving payments in one month or year.
The principal is sacrificed as a must but the payments are higher. This type of annuity is for retirees who wish to have a higher income in their old days of life until death.
To find the right annuity type for you, contact the Yellowbrick financial consultants, and enjoy a happy retirement.
