Annuity is a financial contract you make
with an insurance company. It is a unique financial product
that provides tax deferral of interest and capital gains and
the option of a guaranteed monthly income which you can not
outlive.
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During the accumulation period of an annuity all
premium payments are invested in either a fixed account also
known as a guaranteed account. Your principal and the interest
rate are guaranteed by the company. Interest rates are usually
guaranteed for one year. Higher guaranteed annuity rate are
available for longer durations.
Distribution Period. Withdrawals may be made at any
time from the contract usually with a minimum dollar
amount and at the option of the owner. Systematic
Withdrawal Plan allows the owner to make periodic
withdrawals. The owners of the contract instructs the company
to withdraw a percentage or a level dollar amount from the
contract on a monthly, quarterly, semiannual, or annual basis.
Checks are sent directly to the owner or can be deposited
directly into the owners checking account.
Deferred annuities can be a great
way to accumulate money for retirement, particularly if you
have many years before retirement. Your money grows tax
deferred, which means you pay no taxes on earnings until you
begin to withdraw your money.
Immediate annuities provide a
stream of income payments that will continue for the rest of
your life or for a period you select. If you are about to
retire, an immediate annuity may be a good place to put a
large lump sum of money accumulated through a deferred
annuity, a retirement plan or other savings vehicle.
Fixed annuities earn a guaranteed
rate of interest for a specific time period, such as 5, 7 or
10 years. Once the guarantee period is over, a new interest
rate is set for the next period. This guarantee of both
interest and principal makes fixed annuities somewhat similar
to CDs purchased from a bank. Unlike a CD an annuity is not
backed by the FDIC; its security is directly related to the
financial health of the company that sells the annuity.
Variable Annuities typically offer a range of
investment or funding options, which may include stocks, bonds
and money markets. Variable annuities are uncertain compared
to fixed annuities. Your principal and the return you earn
depend on the performance of the underlying securities and are
not guaranteed.
