Annuities

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An annuity is a financial product sold by an insurance company and it is a good way to guarantee you will have an income stream in the future.

You can either purchase an annuity with a lump sum of cash or  you can make a series of payments.  The annuity will then allocate to you a regular payment either at a later date or beginning immediately.

There are basically two types of annuities either immediate or deferred.  The deferred annuity starts making payments at some date in the future while the immediate annuity starts payments as soon as the funds are deposited.

The funds you invest with the insurance company are invested and the income on these investments grow over time.  Since your funds are included in a pool with other annuity holders you will be getting a better return on the investments.  Funds invested in the pool and not used by younger participants who may have passed away before using all their funds are added to the general total of the funds and used to continue payments for other pool members.

It is better to plan to stay with your annuity for a longer period to time.  There may be fees for terminating an annuity early.  There will also be some management fees.

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The insurance company is allowed to keep any remaining funds in your annuity contract once they have made any payment obligations to you and your heirs.

You can set up an annuity to payout in almost any time frame.  You can have an annuity that will make payments for a certain period of time or one that will make payments for your lifetime.

You do not pay taxes on the income generated by the annuity until you start to receive payments.  Your payments from the annuity will be taxed as ordinary income.

You can have your funds invested in a fixed annuity which will payout a guaranteed amount based on the fund balance in your account.  The fixed annuity while paying a guaranteed amount may pay a more modest amount than the less safe variable or indexed annuity.  The fixed annuity payout is similar to a defined benefit pension plan payment.

With the variable or indexed annuities you assume more risk for your investments.  Keep in mind your payments at retirement are based on how well these investments have done.  However, with an indexed fund you will received a guaranteed minimum payout.

When  you plan to purchase an annuity it is important to consider the financial strength of the insurance company.  Annuity contracts are protected  against insurance company insolvency up to a specific dollar amount depending on the state.  The protection is offered by the state Guaranty Association which is not a government agency.

Talk with a financial advisor who can guide you through the purchase of an annuity which is tailored to meet your needs and the needs of  your family.