Why Buy An Annuity?

June 1, 2010

Annuities continue to be quite popular as part of an overall retirement plan. This insurance-based product provides many benefits that retirees find very desirable – most importantly a potential lifetime income stream. Here is some advice about how an annuity can potentially fit into your overall retirement plan.

Two important benefits of annuities are deferral of taxes and the ability to put large sums of money into an annuity. You can buy an annuity with much more money than is allowed annually in a 401k plan or on IRA. Annuities also offer a number of different payout options that can help retirees customize their cash-flow needs. When you purchase an annuity contract, your annuity accumulates tax deferred until you start taking withdrawals in retirement. If you were to begin taking payments from an annuity before you reach age 59 1/2 you may be subject to an additional 10% federal income tax penalty of the distributions.

They also offer a death benefit; generally if the annuity owner dies before the payment begin, the beneficiary will receive a death benefit payment at least equal to the net premiums paid. Annuities can help an estate avoid probate; beneficiaries receive the annuity proceeds without time delays and probate expenses. The most important benefit of an annuity is the option for a guaranteed lifetime income stream.

Be aware that costs and fees associated with an annuity can be high. There are many limitations, fees, and charges associated with annuities, which can include mortality and expense risk charges, sales and surrender charges, administrative fees, and charges for optional benefits. Surrender charges may apply during the contract’s early years in the event that the contract owner surrenders the annuity. Annuities are not guaranteed by the FDIC or any other government agency; nor are they guaranteed or endorsed by any bank or savings association.

Generally there are two types of annuities – Fixed or Variable. To learn more about the different types of annuities read my article about Fixed Versus Variable Annuities.

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