What is an annuity?
An Annuity is a retirement income planning vehicle that will give you lifetime income and lifetime security, so you never outlive your money. It is a contract between you and an insurance company, where you make either a lump-sum payment or a series of payments. The interest growth on an annuity is tax-deferred, and you do not have to pay taxes on the interest until you actually start taking your withdrawal payments. You can use an annuity for growth during your accumulation phase, and also as a guaranteed income stream when you reach retirement - the distribution phase of your lifetime.
An Index Annuity is tied to a common market index, such as the S&P 500. When the index rises and is performing well, your annuity earns gains. And if the index declines in value, your account is protected and will never lose value. In simple terms, you enjoy the benefit of the market, without any market risk. Index Annuities are popular because the gains can be substantially higher than the interest rates found in Fixed Rate Annuities and other retirement savings vehicles. Depending on the market, Index Annuities have a stronger potential for growth over any other type of annuity. Meanwhile, your deposit is guaranteed to grow at a pre-determined rate in case the stock market does not perform well.
Features of Index Annuities:
- Have Benefits Of Fixed Rate Annuities - Including Solid Returns and Inheritance Options
- Market Linked Gains -They outperform CDs and debt-based vehicles like bonds in the long-term
- Protection of Principal - Your account will never lose value no matter how much the market drops
- Tax Deferred Shelter - Pay nothing on interest earned until you cash out
Fixed Rate Annuities:
A Fixed Rate Annuity gives you predictability. This annuity will grow at a fixed interest rate that is determined by the insurance company and is guaranteed to never renew below a stated minimum rate. Interest credits are usually applied on a daily basis to the Annuity value. The insurance company guarantees you a stream of fixed payments over the life of the Annuity.
- Guaranteed Rate - A fixed interest rate is locked in for a period of your choosing, like a CD
- Retirement Income - Secure, steady and predictable income
- Solid Return - Interest rates are competitive and usually higher than CDs or money market accounts
- Inheritance & Legacy Options - Leave money to loved ones probate-free
- Liquidity - Enjoy 10% free withdrawals, withdrawals of interest or "Annuitization" options give you ease of access to your money when you need it
Also known as Single Premium Immediate Annuities (SPIA's) or Income Annuities, generate income payments to you within 12 months of the issue date. Immediate Annuities allow you to receive a steady stream of income payments instantly, and are usually purchased with a single lump-sum payment. This annuity can be designed to last a lifetime, a set period of time such as 10 years, or a mixture of both. SPIA's are great for people who need income immediately. Your income payment amount is determined by several factors: life expectancy, amount of investment, gender, and payment option.
Features of Immediate Annuities:
- Stability - check is mailed to you on same day every month, just like an income paycheck
- Spousal Protection - Can be designed to last for you and your loved one's lifetime, just like a pension plan
- Inflation Protection - Income can grow from 1% to 5% guaranteed each year, or it can automatically adjust based on changes in the Consumer Price Index (CPI) to protect the spending power of your money
- Cash Refund and Time Period Certain Options - Ensures your money is passed on to beneficiaries if you happen to pass away earlier than expected
Comparing Annuity Companies:
Comparing annuity companies requires several key factors to determine which one offers what you need. It is important you look at the benefits contributed to your retirement plan, types of annuity products offered and the financial strength of the company. There are several Independent rating agencies such as A.M. Best, Standard & Poor's and Moody's, that can verify the company's strength.
Top Rated Annuity Companies: