Frequently Asked Annuity Questions

Annuities can be helpful but complex investment vehicles. We want to help clear up some of the mystery. To do this, in this article, we will answer several frequently asked annuity questions.

What is an Annuity?

An annuity is a financial contract between you and an insurance company. In exchange for depositing a lump sum, you are promised an income stream through regular distributions.

How Much Income Can I Expect?

The amount of your income payments will depend on several factors. These include the amount of your lump sum investment, your age and life expectancy, and the terms of your annuity contract. Your insurance agent should help you to calculate the amount of these future payments.

What Are the Benefits of an Annuity?

There are multiple benefits that come with utilizing an annuity. First, annuities provide tax-deferred growth. The compounding interest this provides can have a beneficial effect on your savings. It also allows you to make tax payments on funds when you are potentially in a lower tax bracket during retirement. Second, you can set up a guaranteed income stream. This can help you fund your retirement with consistent distributions. Third, annuities can provide stability. With some forms of annuities, you are guaranteed a minimum rate of return. This can protect you from downturns in the market. They also can provide joint payments so both you and your spouse receive income. As well as death benefits for your loved ones. Lastly, with a rider, they can provide inflation protection.

What Are the Drawbacks of Annuities?

Just as with an investment, there are potential drawbacks to annuities. First, they are complex. Their intricate terms and provisions can be overwhelming to an unexpected investor. Second, they are not liquid investments. Once you fund the annuity, there are restrictions on when and how much you can distribute. Third, they have modest return. Annuities often have rate caps that limit how much your funds can earn.

What Are the Most Popular Types of Annuities?

There are three types of annuities that are the most popular. These include:

• Fixed Annuity-These types of annuities pay a guaranteed rate for a set period.
• Fixed Indexed Annuity-These have rates of return that are based off the performance of a market index, such as the S&P 500. These allow you to have potential for more earnings with a built-in minimum guaranteed rate and allow you to protect yourself from downside risk.
• Variable Annuity-With a variable annuity your lump sum is placed into underlying investments. They have a potential for unlimited gains but have no downside risk protection.

What Happens to My Annuity When I Die?

What happens will depend on the set up of your annuity. If your annuity has a death benefit your remaining assets pass to a named beneficiary. However, if you do not have a death benefit any remaining assets pass to the insurance company.

What is the Difference Between Immediate and Deferred Annuities?

Immediate annuities generate payments within one to twelve months of making your lump sum deposit. On the other hand, deferred annuities do not allow you to take income distributions until the passing of an accumulation period that lasts several years.

What is the Difference Between Qualified and Non-Qualified Annuities?

Qualified annuities are funded with pretax dollars and can only be funded with other qualified funds from sources such as a 401k or IRA. Distributions made from these accounts, both principle and earnings are subject to tax. Alternatively, non-qualified annuities are funded with money you have already paid tax on and can be funded with any source of non-qualified funds. When you take distributions only the earnings are taxable.

Utilizing an Annuity

Once you understand the basics, many find annuities to be appealing investment opportunities. Additionally, your insurance agent can help you understand the nuances of your specific policy.

Questions? Want to schedule an appointment? Contact us by clicking here.