Annuity Primer - Which Type Of Annuity Can Build and Protect Your Wealth?
What is an Annuity?
An annuity is simply a product that is sold by life insurance companies that allows you to build tax deferred wealth. The traditional use of an annuity is as a a place to invest accumulated wealth that will pay out a monthly some of income. For instance a retiree may want to invest $100,000 in an immediate annuity and begin receiving monthly income of $2,000 right away. The annuity can be structured to pay for a set amount of time, for life, or some combination of options. Obviously if the insurance company only has to commit to a shorter payout period, they will offer higher payouts.
Other annuities allow individuals to accumulate wealth. These are called deferred annuities. For example, a younger couple may begin their annuity with $5,000, and then contribute the same amount every year until retirement. At the end of that time, they should have accumulated a tidy sum in tax deferred growth, plus contributions. Then, at retirement, they may wish to begin withdrawing monthly payments.
Tax Considerations of Annuities
Contributions may be made on a tax qualified basis. That means the amount of the contribution can be deducted at the time of payment, but will have to be accounted for upon withdrawal. The theory here is that income will be lower, and the tax payment will not be as high. Plus, all growth will be upon a larger, pretax amount of money.
Contributions may also be made after taxes. Since taxes have already been paid at the time of the payment, they will not have to be accounted for later. Some financial professionals argue that it is better to pay the taxes now, when the ability to pay is higher. They also argue that we cannot know what the tax rate will be in the future, so we do not really know if taxes will be lower in the future if income is lower.
Annuities and Growth
Of course, annuity investors expect to earn a return on their money. This can be a fixed percentage that is guaranteed by the insurance company. Popular annuities are tied to equity indexes like the S&P 500, and may offer returns that are close to the stock market. The advantage to an annuity investor is that equity indexed annuities may also offer a guarantee that during negative growth years, the value of the annuity will not decrease, or may even grow by a small guaranteed percentage. In return the insurance company may limit growth through caps on returns, or by setting a participation rate that is less than 100%.
Find the Annuity that is Right for You
The world of annuities can be confusing, but these insurance products offer many benefits. They combine low risk with higher returns, and also offer tax benefits. In order to select an annuity product that will allow you to protect your savings or accumulate wealth, consult with financial professionals. Now that you understand some of the basics, you should be able to ask the right questions to help you make a good decision.
M Katz has helped many individuals and small businesses choose the right insurance products! If you have concerns or interest in annuities, read Before You Buy An Annuity
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