Annuities Help Secure Retirement Income
Annuities are essentially insurance contracts which make periodic payments to you in the future or either as a lump sum or over time. You can buy an annuity today for example to give you guaranteed monthly income or to boost your retirement savings. They're popular in Europe but less so in the United States. In Europe they're used mainly for property investments.
There are basically two kinds of annuities: traditional and deferred variable annuities. The deferred variable annuities (also called indexed annuities) allow you to invest money you receive as retirement benefits in an amount and shape that you choose. They work on a tax-deferred basis, which means that the greater the amount invested, the lower your tax bill will be when retirement comes. The traditional type allows you to invest your money directly and set the initial rate and terms. The two major types are: equity indexed annuities (EIA) which are usually favored in Europe, fixed-rate investments such as government bonds (FRB), and the flexible indexed annuities (FIA).
There is a great deal of difference between these three types of annuities. The differences start with the risks involved in each investment type. You'll find that there are many more potential losses with the former than the latter. Equity indexed annuities involve higher risks since you are dealing with what is generally a volatile financial product with high default risks. Fixed rate investments like government bonds involve moderate risks, with some advantages and rewards; however they also come with the cost of loss should interest rates fall.
Deferred annuities generally offer higher interest income and lower risk than ERAs. However, the disadvantage is that the income earned through deferred annuities may not reach the level of anIA or FRB even after a lengthy retirement period. In addition, the benefit amount for early distributions from a deferred annuity is capped. These caps can be lowered by inflation. If you are eligible for both kinds of annuities, you could actually gain more from the ERAs than from the deferrals, but you must take into account the time horizon of the income stream.
Annuities with surrender charges are designed for a specific type of distribution. Insurance companies offer surrender charges when a person retires. Usually, a surrender charge is equal to one percent of the face value of the annuity. This means that any distributions made within the year that exceed the total of the surrender charges will result in taxes. Some insurance companies offer guaranteed surrender charges, but their rules vary from insurer to insurer.
Lastly, we have the variable universal life or VUL. As the name suggests, these annuities come with variable premiums. Although they allow the investor to control risk by varying premiums, they do not feature any guarantee of a payout.
Most annuities come with both a surrender charge and a guaranteed distribution. Universal life annuities, as its name implies, come with all of the characteristics of the indexed annuities. Premiums are guaranteed, however, unlike the indexed annuities. The main difference between the two is that the premiums in a universal life contract do not grow over time, but are set at a specific rate. In addition, the insurance companies allow investors to choose the level of income they want their money invested in. This means that the potential payout from insurance companies is not dependent on the economy in general, but is instead dependent on how the stock market is performing in relation to certain investments.
Regardless of the type of annuity or insurance contract you choose, it's important to understand your options when it comes to investing for your retirement. In order to determine what type of annuity will work best for your specific financial goals, it's a good idea to consult with a qualified financial advisor. The advisor can help you determine the best types of annuities for your specific needs, as well as help you secure the security of your investment by providing backup insurance in the event of a downturn in the stock market. Annuities provide retirees with a method of securing their future by building a guaranteed stream of income in their later years.
EmoticonEmoticon