Common Annuity Questions Answered

If you are thinking about planning for retirement, you probably have many annuity questions. Some of the most common annuity questions are:

  • What is an annuity?
  • Why should I buy an annuity?
  • What are the advantages of an annuity?
  • What types of annuities are available?
  • Which annuity should I buy?

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Annuity Investment Basics

An annuity is an investment plan that is usually purchased from an insurance company. With an annuity, you receive a guaranteed series of cash payments on a regular basis as long as the annuity plan is in force. An annuity is a long-term investment program that allows earnings to accumulate on a tax-free basis until money is withdrawn. Annuities are used chiefly to provide income after retirement. Annuities also offer investors the chance to count on an income stream that they can’t outlive. Annuities can offer a virtually risk-free way of accumulating income, since many of the plans never put your principal investment amount at risk.

Advantages of Annuities

Annuities offer a guaranteed, low-risk way to obtain a fixed monthly income payment for the lifetime of the annuity owner. No medical examination is required to purchase an annuity, which differentiates this plan from life insurance. Also, annuities can be tailored to your unique situation and ensure that you will not outlive your money. The interest earned from an annuity plan is usually tax-free until payments are received, which allows for compounding of interest and potentially significant fund growth.

Types of Annuities

The most common types of annuities are fixed, variable, immediate, and single premium deferred annuities. Fixed annuities provide a guaranteed interest rate for a specific period of time, resetting that rate once the period has elapsed. Variable annuities use investment options like stocks and bonds to provide a variable rate of return based on market performance. Immediate annuities are purchased with a single payment and provide a guaranteed fixed payment as soon as this premium is paid. Single premium deferred annuities are similar to immediate annuities, but you can receive payouts at a later date, with taxes on interest deferred until payment is received.

Which Annuity Should You Buy

The choice of an annuity depends on your personal situation and investment goals. It is recommended that you consult with a financial planner or retirement expert to discuss your needs before buying an annuity. For more on choosing an annuity, see: Which Annuity is Right for Me?

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