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Annuity Insurance

There are many different methods of saving for retirement. Adding an annuity plan, in addition to an IRA, either Roth or traditional, 401(k) plan, stocks, etc. are all common means of planning for your future. Evaluating the pros and cons of each type of retirement savings are important to developing the best and most effective plan for you.

An annuity is a series of payments over a specified amount of time. Contracts purchased from a life insurance company are typically paid in annuities and all funds in an annuity grow tax-deferred. An annuity is basically an insurance contract. They are sometimes referred to as a life insurance annuity. The premiums you pay into an annuity are similar to depositing money into a bank account.

Annuities typically fall into two categories:

  • Fixed annuity: offers a pre-determined interest rate on your earnings which is guaranteed for a specific period of time, depending on the contract.
  • Variable annuity: premiums are invested in stocks, bonds, and money market accounts, much like a 401(k) plan or a traditional IRA. Purchasers of this type of annuity can select the funds where their money will be invested. The annuity rate, or amount paid out, is determined by the performance of the selected investment option.

Both of these types of annuities, in addition to being a source of retirement income, also have an annuity insurance component. Depending on the policy chosen, insurance options in variable and fixed annuities include guaranteed payments for as long as one lives, guaranteed death benefits, or sometimes payments throughout the life of your beneficiary, similar to life insurance.

Annuities are very similar to life insurance; however most annuities companies do not require you to make continual monthly payments. Generally, it involves just one lump sum payment to the annuity company, who then invests the money in the funds you choose. Be sure to research this aspect carefully, as it is important to know if you will be required to continue paying a premium.

When you decide to invest in a life annuity, you determine the amount of money you want to invest, for example $15,000. You can write a check for that amount, and then you’ve paid a $15,000 premium into the annuity. Some people make continual annuity premium payments. If you choose to do so, there may be a slight surrender period during which the previous money paid must remain in the account.

Like all retirement investment choices, some people will benefit more from an annuity than others, and some will prefer a variable to a fixed annuity. How should you decide which annuity to invest in?

Annuities are a good option for consumers who have already maxed out their 401(k) or IRA plans and have additional money they want to invest, or someone who may already be retired and fears they may outlive the money they already have to live on. For these investors, a fixed or variable annuity would give the retiree a guaranteed income for the rest of their life.

When investing in anything, be it an annuity, IRA, stock, bond or 401(k), it is important to choose an annuity company with a good reputation, and compare all fees and other charges the purchaser may incur, as well as the potential tax advantages of their particular annuity.

Variable and fixed annuities have many of the same retirement benefits as 401(k) or 403(b) plans or an IRA. The benefit of an annuity over those type of plans, or in addition to those plans are that annuities do not have contribution limits, income limits or mandatory withdrawals like other retirement plans. Since after-tax dollars are used to purchase the annuity, the earnings grow tax-free.

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