4 Reasons to Invest in an Annuity

An annuity is a contract that you purchase from an insurance company or other financial institution that guarantees a lifetime income stream. For a lump sum payment to the issuer of the annuity, you are can receive either a lump sum, a certain number of payments or any combination of payout options. Annuities have sometimes been called a reverse life insurance policy because you get the income before you die. Annuities are a good choice for retirees because you can never outlive your investment.

Advantages of Annuities

Tax Advantages Income generated by an annuity grows on a tax deferred basis. You will not have to pay any taxes on the earnings generated until the funds are withdrawn. The income is usually not withdrawn until retirement when the investor is usually in a lower tax bracket. Annuities are ideal for an investment or retirement portfolio for this reason.

Potential for Lifetime Income Many retirees worry about outliving savings, unexpected medical bills or the inadequacy of retirement or pension income. Purchase of an annuity provides a sense of financial security because the income is guaranteed for life. It is a dependable and steady source of income.

Safety Features The issuer of your annuity is contractually obligated to pay you the agreed upon payout for life. Therefore, annuities are considered safer than more risky investments. The safety of your principal or contribution is guaranteed.

Flexibility There are a number of options for receiving your funds from an annuity including a lump sum, a fixed number of payments ( 10 years for example ) or payments for life.

Types of Annuities

Fixed Annuities Fixed annuities are more safe and predictable than variable annuities. Your interest rate and income stream are guaranteed and you can never lose your principal.

Variable Annuities Variable annuities offer safety with growth potential but also more risk than fixed annuities. Your funds are invested in mutual funds which include stocks, bonds and other investments that may increase or decline depending on market conditions. Your account value could go up or down depending on the investment selection.

A variable annuity can be structured with certain options to allow immediate payout and still allow you to take lifetime payments later on. You may take 10% of your money out of a variable annuity each year without penalty. However, if you are less than 59 ½ years old, withdrawals will be subject to Federal income tax penalties.

Immediate Annuity - An income annuity is immediate and does not accumulate value. The investor makes a lump sum payment to the issuer and immediately begins receiving income. Older retirees who need to increase supplemental income right away often use this option.