What is an Annuity?

by Wes Bridel on September 19, 2012

in Stewardship

An annuity is basically a savings or investment vehicle offered by an insurance company.  It should not be considered an investment technically, because it is not.  And it should not be considered a bank savings account, because it is not.  But different types of annuities have features that might be very similar to these other types of products, or might be a hybrid between these two ideas.  We’re continuing the series which began here.

Annuities also have characteristics that are unique in all the financial world.  For instance, an annuity is the only product that you can buy that will guarantee you income for the rest of your life.

This introduction to annuities is not meant to describe every facet of every annuity, or even of one particular annuity.  Instead, it is meant to give you a broad overview.  You should investigate the particular annuities you are considering purchasing to determine exactly what it promises to determine how it will perform.

We’ll cover the following types of annuities:

1)      Immediate

2)      Fixed

3)      Variable

4)      Fixed Index

Each is different and offers it’s own advantages and disadvantages.  We’ll let you know up front that we think some of these types of annuities are a bad idea for most people, but others are a terrific idea for the right person depending on his/her situation.

Annuities typically bring tax deferral advantages as well as asset protection advantages in many states.  So they typically reduce your current tax bill and offer protection if someone sues you or in some other way tries to claim your assets.  Also, because it’s a contract it can avoid probate without having to use trusts, etc.

As with any other product, the quality of the company you buy your annuity from is important.  Although insurance companies as a whole are vastly superior to banks and Wall Street firms when it comes to safety and stability, there are bad instances in all industries.  Thus, you want to pick the right company to depend on well into the future through all possible economic environments.

Annuities typically carry surrender charges for a certain surrender period of time with a percentage (typically 10%) that is allowed to be withdrawn annually without any charge.  There are also usually other caveats that would allow you to access the funds without a surrender charge such as death or long term care need.  However, an immediate annuity is typically an irrevocable choice.

Remember that if you’re under 59 ½, you do receive tax deferral by putting money into an annuity, but you will face IRS penalties if you pull the money out before you reach 59 ½.

In this study, we’re focusing on types of products, not particular companies or their particular offerings.  We’ll begin detailing each type on Friday…

This is the 5th post in our series of innovative new insurance products.  You can find the previous posts at: 1) Innovative Insurance, 2) Long Term Care, 3) Long Term Care Solutions, & 4) Free Long Term Care Insurance.  If you’d like to read the entire series on insurance that we previously wrote, you can do so by reading Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8, Pt 9, Pt 10, Pt 11, Pt 12 and Pt 13.

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