Insurance For The Rest Of Your Life
Many people purchase life insurance policies so that in the event of an untimely death, the needs of their loved ones are taken care of. However purchasing an annuity contract is the exact opposite. It is an insurance policy in the event you live too long, beyond the means of your assets.
An annuity is a unique financial product offered by insurance companies with the distinct feature of offering a guaranteed income stream for the remainder of your life. The U.S. Securities and Exchange Commission defines annuities as follows. “An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.”
There are two basic types of annuities, fixed or variable with each having the option of being either being immediate or deferred. Immediate annuities will begin making payments in the period after the contract is entered while deferred annuities will begin making payments at some future date.
Fixed annuities will grow at an agreed upon rate whereas the value of variable annuities will be determined by the value of the underlying investments. For an added cost many insurance companies will offer a variable annuity that will have a guarantee that the value will not fall below the initial principle amount.
Like a 401(K) plan or IRA, income is earned on a tax deferred basis in that you don’t pay any tax until you start receiving your first distribution payments. But unlike those other two plans an annuity contract is not restricted in the amount of money you can place into it. Another key feature is that distributions from those retirement plans receive preferential tax treatment in that they are not taxed as income if used to fund an annuity contract.
With the uncertainty in the social security system in the future, coupled with the news that many companies are unable to fund their employees pension plans, annuities are becoming more and more important in planning for your retirement years. Talk to your financial advisor and insurance agent to see if an annuity is right product to meet your long term financial goals.
