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What are Annuities?

By Compuquotes Team on October 1st, 2008

Annuity

It was once thought that annuities were something only the very wealthy invested in, but that has changed in recent years. In fact, annuities are one of the most popular and frequently used forms of retirement investing within the United States today. Annuities provide real advantages including competitive interest rates, tax deferral advantages of compounding principal and interest over extended periods of time, and guaranteed income for life. Annuities are chosen by many people in order to protect their estates, avoid probate after their death, and to pass money on to loved ones and heirs.

An annuity can be an excellent way to save for anyone who wants to make the most of long term savings plans in an efficient and effective manner. Many financial planners compare annuities to insurance policies because in many ways, they actually are similar. The comparison may also originate from the fact that many insurance companies actually sell annuities. Like most types of insurance, you make payments, or deposits into the annuity, in order to receive benefits later. Unlike insurance, you do not need to experience a peril or illness in order to receive the payout later on down the road.

Annuities are an ideal investment vehicle for anyone who believes that they will outlive their life savings. With an annuity, you can guarantee an income for the rest of your life, although in many cases you will not be leaving anything to your heirs. Depending on the amount of money you invest, either in one lump sum or in payments over time, will determine the amount of money you receive as payout when you choose to cash in the annuity.

There are several different types of annuities which include fixed, variable, deferred, and immediate. The type of annuity depends on the payout. A fixed annuity refers to one that has a guaranteed payout and interest rate, with very little risk since the funds are typically invested in a government bond. A variable annuity refers to one that has a little more risk involved, but the benefits could be much greater usually because the funds are invested in the stock market. Deferred and immediate annuities refer directly to the way in which the funds are paid out - either immediately in one lump sum or over a period of time. When you purchase the annuity you will choose which type is best for you.

Like IRAs, the funds within the annuity are tax deferred until you begin making withdrawals. However, it is important to note that you should not take any funds out of the annuity until the age of 59 1/2 otherwise you run the risk of having to pay surrender fees to your insurance company and a 10% federal tax penalty as well as income tax on the amount you have taken out.
When buying annuities, always be sure to do so from a reputable company. While big company names are not always the ideal solution, as they do not guarantee the best interest rates. What really matters when shopping for annuities is the ratings of the insurance company, their financial rank, and the level of customer service that they provide to you.

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