Annuities are long-term investments that are designed to provide you with an income at some point in the future, such as upon your retirement. Since the goal of an annuity is to give you and/or your spouse a source of income each month for an extended period of time, purchasing an annuity can be an advantageous means of investing your money, planning for your long-term financial future, and avoiding probate.
Most annuities are either single premium annuities, which require a single premium payment, or multiple premium annuities, which require multiple premium payments over a period of time. Likewise, you can purchase immediate annuities, or deferred annuities. Immediate annuities provide you a periodic source of income as soon as you pay a single premium. On the other hand, deferred annuities postpone your receipt of any income for a specified period of time. Once your annuity reaches the date of maturity, you will begin receiving income from your annuity, which will continue for the duration of your payout period. So long as you do not withdraw the cash value from your annuity, you do not pay income taxes on your income until you begin receiving payments from it. As a result, a deferred annuity is an attractive option for allowing your assets to accrue interest tax-free, which can help preserve your hard-earned assets for your spouse and children. Furthermore, no matter what type of annuity you choose, it is an asset that will not go through probate; like a life insurance, you designate a beneficiary who can inherit your annuity investment without the need for opening an estate with the probate court.
The methods by which different annuities earn interest vary. For instance, a fixed annuity guarantees you a certain monthly payment, no matter how much or how little interest the money that you have invested in the annuity earns. An equity-indexed annuity, however, is linked to a standard equity index, such as Standard and Poor’s 500. In this case, the interest on the money that you have invested in the annuity will fluctuate depending on the stock market. Finally, interest earned on a variable annuity is tied directly to your chosen investments, and can fluctuate dramatically, depending on the market. Since you potentially lose your annuity investment altogether in a variable annuity, this type of annuity is definitely the most risky choice. Thus, you must take into account the amount of risk that you and your spouse are willing to bear for your annuity income.
If you are considering purchasing an annuity, you must take into account your financial goals, both short and long-term, your physical health, your need to support others, such as a spouse and/or children, as well as the role that an annuity would play in your overall financial worth. For instance, if you became terminally ill, and had no surviving spouse, would the annuity that you are considering allow you to remove your investment without harsh penalties and/or tax consequences? How would potentially losing your investment in a variable annuity affect your children’s inheritance? How would periodic annuity income fit into your existing retirement income framework? As you consider whether an annuity is right for you, you must bear in mind all of its potential consequences for you and your family.