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What is an Annuity? Overview
Home » Retirement » What is an Annuity? » What is an Annuity? OverviewA Retirement Annuity Plan is a contract sold by an insurance company designed to provide payments at a designated time to the holder, usually upon retirement. Annuities may be single or flexible payment, fixed or variable; deferred or immediate. These financial agreements with insurance companies are designed to be a source of retirement income. The payments are a series of payments of a set size distributed to you either annually, quarterly, etc. Annuity plans are tax deferred until withdrawal. If you decide to draw on the money before retirement, a penalty is incurred. Annuities also have a death benefit. It is equivalent to the higher of the current value of the annuity or the amount the buyer has paid into it. If the owner dies while paying into the annuity, heirs will inherit the accumulated amount in the annuity. There are other stipulations if the owner of the account dies while receiving payments. It should be noted that this money is taxed with ordinary taxes and estate taxes, too. Annuities may be purchased all in one lump-sum or you can purchase a single-premium annuity. If you desire to purchase more annuities, then you must purchase another one instead of contributing to the one you already bought in one lump-sum. A flexible-payment annuity enables the purchaser to contribute money at regular or irregulars intervals anytime you see fit. There are two phases to an annuity account: accumulation phase and the withdrawal phase. Accumulation means exactly what the word implies. You give money to an insurance company or an investment firm. You can give them your money in several ways including a one-time sum or over a period of time. Annuities are a great way to supplement your other pension plans especially if you have contributed the maximum amount to them. Before investing in an annuity, one should make several considerations. You should know how much other retirement money you have accumulated through Social Security and other pension plans. It is wise to do your homework and know what kind of annuity would work best for you and your family. Make sure you will be able to maintain the money in the annuity accounts. If you surrender your account (retrieve your money before retirement), your payment plan will be penalized in how many fees will be required. Also, do your homework and make sure you have competent insurance companies or investment firms.
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