Annuities are often low risk retirement investments that pay out consistent income over time. They are also tax sheltered and in some cases legally protected financial instruments. These features in addition to other unique aspects described herein, make annuities a reasonable investment option for individuals less inclined to invest independently in high risk, non-tax sheltered financial instruments.
There are many types of annuities, all of which have distinct advantage and benefits to potentially high-risk investments albeit with a moderate yield. Annuities are typically sold through life insurance companies, but by definition can also include any investment paying a consistent amount on a periodic basis. Some school districts and other non-profit organizations may also offer annuity programs.
• Types of Annuities
To better understand the benefits of annuities it is a good idea to first know what the main types of annuities available are. There are many hybrid, specialized and customized annuities available, but most have primary common features as described below:
Fixed Annuities vs Variable Annuities: Fixed annuities are more stable than variable annuities in terms of yield. A fixed annuity is just that, fixed with a set percentage rate of return that does not change over time. The variable annuity is subject to changes and thus the return on investment may fluctuate.
Immediate vs Deferred Annuities: Immediate annuities generally guarantee a future income stream in exchange for a front end cost. Immediate annuities can be fixed or variable depending on what company the annuity is bought through and what one’s preference is. Deferred annuities also offer future payments, but the up front costs are distributed over time.
• Benefits of Annuities
Financial management:
When investing through annuities the financial expertise of the company providing the annuity is what is used to increase the value of annuity and help guarantee future income.
Low risk investment:
Since annuities often guarantee percentage returns in the middle single digits. An investor can generally rest at ease knowing the annuity provider is responsible for this return regardless of what the financial markets do. What’s more, similar investments with comparable returns may not earn tax deferred income and other unique features available through annuities.
Tax deferred income:
One of the best features of an annuity that is purchased through a life insurance company is the tax status of the earnings. If the annuity is used as a retirement savings instrument, the income earned in the annuity is tax deferred until it is used. One will stay pay taxes in such an instance, but if one’s income, income tax bracket or tax levels go down by the time of withdrawal there is a financial benefit in addition to having a lower taxable income at present.
Retirement savings:
Annuities can be used as a replacement for or supplement to social security, pensions and Individual Retirement Accounts. Since they have similar tax status to some IRAs and certain privileges not associated with non-tax sheltered investments, they are similar in structure to retirement investment vehicles.
Security and legal protection
Annuities bought through life insurance companies enjoy a certain protection that other liquid assets do not. In some cases the event of bankruptcy, garnishment or law-suit, one’s annuity investments may be safe. This is due to legal distinctions that assist the company providing financial management services to protect themselves, and their assets.
Alternative to life insurance:
In the event of death, annuity income can be passed on to heirs, beneficiaries and/or trustees. Thus, the annuity can be considered as an alternative to life insurance distributions should one be unable to afford both.
• Tips on buying annuities with the best benefits
Compare:
Since there are so many types of annuity products available, some of which combine product features, it may be a good idea to assess each annuity in terms of one’s own financial expectations, needs and comfort level.
Investigate:
If an annuity package is too complicated or difficult to understand there may be some financial caveat or potentially expensive unbalance quid pro quo requirement for financial services offered. In other words, to avoid investing in the dark, have an insurance agent or financial services representative explain everything in detail.
Diversify:
Annuities are not the only financial instrument around. While there are good retirement savings annuities out there, it may be beneficial to retain and/or keep contributing to an Individual Retirement for purposes of diversification, risk avoidance and added security.
Institutionalize:
Select an annuity provider carefully. Some annuities may have better features, offer higher yields and lower fees than others. Additionally, the companies that offer annuities may have financial insurance other companies do not protect them and their clients assets from potential financial obstacles.
Summary:
Annuities are in their best sense a tax sheltered, legally protected, guaranteed income retirement investment tool. While even the most stable of investments are subject to risk of kind or another, annuities are a fairly stable and low risk investment. The benefits annuities provide are many which make them a conservative investment worth considering in retirement, insurance and tax planning.