Annuities are like a personal pension plan that you purchase from an insurance company. There are several types of annuities to provide you with different types of income streams.
The basic structure of an annuity is that you, the annuitant, pays a lumpsum amount of payment or can set a series of payments to the insurance company in exchange for future income stream.
The insurance company will utilize your funds and invest with it and guarantee you to make a payment in the future.
The other type of annuity that is commonly heard of is deferred annuity and immediate annuity. In deferred annuity, as the name suggests, the annuity accumulates and grows on a tax-deferred basis. It’s like a savings account and your money grows over time.
Deferred annuity:
With deferred annuity, you don’t pay taxes until you start receiving the income and is primarily used as a long-term savings and investment.
Immediate annuity:
The immediate annuity, as the name suggests, provides payments shortly after the insurance premium is paid. Many people choose this if they are looking for another stream of income.
The annuities can also be fixed or variable annuities. What this means is that the insurance company will guarantee a fixed amount of income versus an variable annuity that is linked to a performance of investment such as mutual funds and the amount can vary (can go up or down).
While fixed and variable annuities are simple, to add the little variety, there are indexed annuities. These are tied to the market performance and are a bit like fixed and variable. This annuity comes with a fixed minimum guaranteed amount while there is potential for growth. This indexed annuity comes with a safety net.
Annuities are known for providing an income source and guarantee the payment. It’s a reliable source of income that will not run out, regardless of how long you live.
Although annuities are a great income source, many annuities have “surrender” charges (when you withdraw) and the surrender charges decrease over time. Also, withdrawing funds before a certain age may also incur fees and charges.
Consulting with a financial advisor can help you make informed decisions that match your unique circumstance. Karstens Wealth advisors can review the contractual terms and features, risk tolerance, financial goals and retirement needs.