When it comes to investing, what images first pop up. Is it the chaotic New York Stock Exchange trading floor? Maybe it’s the stock symbols you anxiously keep an eye…
When it comes to investing, what images first pop up. Is it the chaotic New York Stock Exchange trading floor? Maybe it’s the stock symbols you anxiously keep an eye on? Or, perhaps, it’s your annual mutual fund report that probably can help you drift off the sleep. Regardless of what you exactly think of when it comes to investing, I highly doubt that you would lump in annuities . And, for good reason. An annuity is a long-term policy contract between you and an insurance company, not an investment.
At the same time, annuities sometimes have characteristics of investments. And, they may still be able to play a role in your investment portfolio. However, it’s ultimately determined by factors such as your investment goals, your age, lifestyle, risk tolerance, and time horizon for investing.
So, are annuities good investments or not? Well, let’s help you answer that question. Annuities 101
The concept of annuities is confusing for many people. In fact, according to a Secure Retirement Institute (SRI) study , only 25% of consumers managed to pass an annuity knowledge quiz (70%). As such, this can make it difficult to determine whether or not an annuity is a good investment.
With that in mind, before committing to an annuity, you should at least be familiar with the basics.
In the simplest terms, an annuity is simply a contract between you and an insurance provider. With an annuity, you can protect your principal, generate lifetime income, plan for your legacy, and pay for long-term care costs.
With annuities, you can make a premium payment to the issuer in one lump sum or through a series of over a period of time. Similarly, annuity payments can either be one lump sum payment or a series of recurring payments. Among the companies that sell annuities are insurance companies, banks, brokerage firms, and mutual fund companies. The different types of annuities.
It’s also important to note that all annuities aren’t alike. In fact, there are many types of annuities , and they each have their own benefits and drawbacks. As soon as you know the types of annuities available, you can ask the right questions about them.
A deferred annuity begins paying out after a certain period of time, whereas an immediate annuity pays out immediately. Depending on the individual’s needs, annuities can also be structured differently. You can choose to payout over the course of a lifetime, or you can choose to payout for a set period of time.
There are also three other annuity structures; Fixed annuities. During the duration of a fixed-rate annuity , owners receive a fixed rate of interest. For example, every deposit you make with Due will earn you 3%. Therefore, this is the equivalent of a certificate of deposit. Despite the fact that the interest rate won’t change when the market performs well, it is a safe and predictable solution.
Variable annuities. Variable annuities, in contrast to fixed annuities, fluctuate in value with the market. This makes it a riskier and less predictable option because gains and losses are based on performance.
Fixed indexed annuities. This annuity combines the advantages of a variable and a fixed annuity in one package. As with a fixed annuity, it offers investors a guaranteed minimum rate of return. A fund may also follow a benchmark index, such as the S&P 500). If the market rises, the fund may enjoy greater gains. You should always read the fine print because caps, spreads, and participation rates will affect the upside.
Why do people buy annuities?
Most people decide to purchase an annuity because it offers the following perks; It can be comforting to have an annuity. This is especially true for retirees who are worried about stock market volatility or outliving their savings.
It is possible to earn tax-deferred interest on an annuity.
You can make unlimited annual contributions to an annuity — unlike 401(k)s or IRAs.
When compared to traditional retirement accounts, annuities don’t require you to start withdrawing money at 70 ½.
Generally, even if you haven’t withdrawn any money from your annuity, your beneficiaries can receive payments after you die. At the same time, there are some valid criticisms regarding annuities. Most notably, they can be expensive and complex. What’s more, they aren’t federally insured. And, if you make a withdrawal before the age of 59 […]
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