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Annuities can help meet retirement needs
You protect your car, your home and even your life with insurance, but are you leaving your retirement income unprotected? With potential for tax-deferred growth and a guaranteed income stream, annuities can be important to your retirement objectives. Annuities can help you grow — and protect — your retirement income. Work with one of our financial professional to find out if an annuity may be right for you.
An annuity is essentially a contract between you and an insurance company. You buy an annuity by giving an insurance company either a single lump sum or making payments over time. The insurance company then invests your money (called “premium” or “purchase payment”) in different ways depending on the type of annuity you select. You can buy an annuity that begins making payments back to you right away (an “immediate annuity”) or, if you prefer, annuities are available that delay making payments to you for an extended period — sometimes many years — while your investment in the annuity grows. This is called a deferred annuity.
There are two types of annuities that investors can choose from when it comes to purchasing these instruments. Immediate annuities will begin paying a stream of income immediately upon issuance for either a set period of time or as long as the annuitant or annuitants are living. Immediate annuities are funded with a single lump-sum purchase.
Regardless of the type of annuity you buy, the primary purpose is to create income for you, and there are different ways to do that. You can set up payments that last for your entire life, a specific period of time, or a combination of both.
For example, you may choose to receive monthly payments for 20 years.
In this scenario, the company will calculate the payment amount based on your premium or the current value of your annuity contract, and begin making payments. Under this plan, you would be guaranteed to receive 240 monthly payments. If you were to die before all the payments were made, your beneficiary would receive the remainder, until all 240 payments were made.
Alternatively, you may want payments for your entire life, with a guarantee that payments will be received for a certain period of time, say 20 years.
In this example, if you were to die before the company made 240 monthly payments (20 years), your beneficiary would get the remaining payments, just like in the situation above. If you lived past the end of the 20-year guaranteed period, however, the insurance company would continue to make payments as long as you lived but your beneficiary would not be entitled to any payments after your death.
If you buy a deferred annuity, you can take withdrawals from the contract, even before your income payments begin. Each annuity has its own rules about how much you can withdraw from the contract without incurring a penalty — called a “surrender charge.” You may also completely surrender a deferred annuity. That means you tell the insurance company to cancel your contract and pay you the surrender value — the value of your contract less any surrender charge the company imposes.
Annuities are commonly used for retirement planning. They allow you to convert a lump sum of money into guaranteed income for the rest of your life, or to invest over time and later convert the annuity contract's value into guaranteed income payments. And, any growth in your annuity value is generally not taxed until you take money out of the contract. This combination of tax deferral and the ability to establish guaranteed income can make an annuity an effective tool for retirement planning and other long term goals.
As you determine what annuity might be right for you, remember they are intended as vehicles for long-term retirement planning, which is why withdrawals reduce an annuity's remaining death benefit, contract value, cash surrender value and future earnings. Annuities also may be subject to income tax and, if taken prior to age 59½, an additional 10% IRS tax penalty may apply.
Annuity payments from a tax-qualified plan will be fully taxable as ordinary income