Annuities can be used to:
- Provide a steady income stream that you will never outlive
- Protect your family with death benefits
- Defer taxes earned on gains
- Diversify your assets
Annuities are life insurance contracts that may be used in several ways. The most common is that a person funds an annuity during or at the end of his or her career, the money grows tax free in the annuity, and during retirement the money is distributed to the policy holder over a period of time, like a pension. It’s important to note that only a portion of these distributions are subject to income taxes and since annuities are usually distributed after retirement, the taxable portion may be taxed at a lower income tax rate.
Different annuities may pay different amounts over different periods of time. Some annuities pay the policy holder until death while others might continue to pay the spouse after the death of the original purchaser. Other annuities may pay a fix percentage for a 10 year period, and still others distribute all funds in one single payment. These are some of the things that you should discuss with your financial advisor when purchasing annuities.
The two main types of annuities are immediate annuities and deferred annuities.
Immediate Annuities enable you to begin to receive payments immediately after a one time contribution and are designed to provide income as soon as you retire. With the cost of rising heath care and inflation, a single payment immediate annuity ensures that you receive steady income for the rest of your life. Distributions can be made to you monthly, quarterly, annually or semi-annually, and asset growth is tax deferred.
Deferred Annuities enable you to contribute payments at once or through flexible payments over time. These annuities are best suited for people who are still in the work force and wish to receive a steady flow in income after retirement. Like immediate annuities, deferred annuities can payout monthly, quarterly, annually or semi-annually, and asset growth is tax deferred.
Another factor to consider when purchasing annuities is how your assets are invested. To learn more please see Fixed and Variable Annuities.
