What are Annuities?

What are annuities?

You can think of an annuity as a stream of payments. They’re bought through an insurance company and pay out the benefits over time. Annuities seem to have a bad reputation, but there are both good and bad uses for them.

Types of annuities

Fixed annuity - The funds earn a predetermined interest rate that will never change

Variable annuity - The interest rate is attached to a set market or index

Qualified - The annuity is purchased with pre-tax dollars and benefits will be taxed

Non-qualified - The annuity is purchased with post-tax dollars so benefits are tax-free

When do they payments start?

  • Immediate - These annuities start paying right away

  • Deferred - These annuities start paying at a date in the future

One of the reasons annuities have a bad reputation is that in the past, when you died, the insurance got to keep all the money. However, modern annuities have some different options called riders.

  • A survivor benefit continues coverage for your spouse after you pass away

  • A return of premium benefit returns some of the premium if the annuity ends early for some reason

Risks

Risk tolerance factors in when deciding if you need an annuity or not. If you would like to protect your money from market risk, an annuity may be a good option. You receive payments with a guaranteed interest rate. That being said, you won’t have nearly the potential returns of other investments. Annuities can also help you stay responsible and make sure you won’t completely run out of money. Another risk, however, is not being able to get your money out when you need it. There can be fees if you try to withdrawal money early.

“Money Tip of the Week”

Focus, focus, focus. Put away phone when you need to get work done so you don’t get distracted. Delete social media for a while so you can focus on what’s truly important and see what difference it makes!