Annuity Buying Guide
By Frank Topol
The most important type of investment that most people will ever make, an annuity, is actually an insurance product. Unfortunately, many consumers avoid annuities simply because they are either unaware of their benefits or they don’t understand them. An annuity is simply a contract between an insured and an insurance company in which there will be a series of income payments paid to the consumer in return for paying premiums.
Although this can seem confusing at first, most individuals find it easier to understand when they realize they are essentially putting money aside that will be available to them during retirement. Annuities can guarantee that a policyholder will not outlive their income, so they are commonly bought for future retirement income.
Annuities are either classified as immediate or deferred, but this simply refers to when the income payments will begin. In an immediate annuity, a lump sum is paid to the insurance company and the income payments begin within 1 year. In a deferred annuity, premiums are often paid to the insurance company over time and the income payments will begin much later.
There are multiple types of annuities, but it all boils down to whether they are fixed or variable. Fixed annuities have a set interest rate that a policyholder is guaranteed to receive on their premiums. The funds will grow in an account tax deferred until they are annuitized or turned into income payments. Variable annuities are often tied to a series of investments of to a specific index and the growth could be larger in some years and smaller in others. Variable annuities often have management fees and other expenses, whereas fixed annuities do not.
The decision as to what type of annuity is appropriate is largely based on one’s tolerance to risk. While there are risks involved with a variable annuity, a fixed annuity is often considered to be extremely safe. Each state has a pool of funds that is designed to protect policyholders in the event of an insurance company declaring bankruptcy. In addition, there are strict reserve requirements that will promise to protect the funds of investors.
Compared to other types of insurance products, there are not many ways that a policyholder can decrease the cost of an annuity. However, each insurance company offers many different options within their programs and it is more important to select the most appropriate. Variable annuities often have many fees involved, so it is possible to compare these programs and pick one that is less expensive. The best way to secure the most appropriate annuity is to shop around, but this doesn’t have to be a time intensive process. Comparing multiple quotes online can be a quick and efficient way to find the perfect annuity.
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