So, What Are Annuities?

Annuity contracts are purchased from a life insurance company. The buyer gives the company a lump sum or a series of payments. In return the company will provider the consumer with a stream of payments. Annuities are classified as immediate or deferred annuities. Immediate annuities start making payments within a year. Deferred annuities stipulate payments in a more distant future –such as 10-20 years.
An immediate annuity is purchased as a way to avoid the risk of outliving assets in retirement. It is paid for with a lump sum payment. In return the insurance company starts making scheduled payments. The payments can be structured for the life of an annuity owner or an owner and his/her spouse. The risk of depleting the asset amount is transferred to the insurance company and the company charges fees to assume this risk.
Deferred annuities are a tax advantaged vehicle used to accumulate funds for retirement, so there are penalties for withdrawals prior to age 59.5. Most workers first look to workplace retirement plans and Individual Retirement Plans before deferred annuities. These plans can offer tax deductions and may have less fees.
Like all investments, annuities have advantages and disadvantages. One of the advantages is that earnings grow tax deferred until withdrawals are made. A disadvantage is that if you need to access funds before the payment time stipulated in the contract there will be a surrender charge. In addition, fees & expenses may be higher than other investment vehicles.
For more information view our recorded webinar, “Annuities 101” at http://bit.ly/19h7VQT