What are Annuities and When Should You Use Them?

Planning for retirement and a child’s college education are two examples of mid and long-range goals that annuities may help you achieve. This Financial Guide explains the principles behind subsidies, covers several types of annuities, and aids you in deciding which annuity product is best for your circumstances. Additionally, it covers the tax implications of annuities and explains how to look for both an insurance provider and an annuity once you’ve determined which kind you’ll require.

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Procedures for Annuities

In contrast to conventional life insurance, which protects against “dying too soon,” annuities, in essence, can be used as protection against “living too long.” In short, you receive a series of periodic payments guaranteed as to amount and payment duration when you purchase an annuity, typically from an insurance company that invests your cash. This means that if you accept the annuity payments throughout your lifetime (although there are many alternative options), you will have a steady source of “income” until you pass away. If you “die too soon” (i.e., do not outlive your life expectancy), the insurer will refund you far less than what you invested.

During the term of the annuity, income earned is not taxed. As long as they are not paid out, they are tax-free. Investing in tax-deferred securities can provide a faster return than investing in taxable securities.

How Annuities Serve Investors the Best

An annuity can be used as a vehicle for investing for the following two main reasons:

  • You wish to put money aside for a distant objective, or
  • For a specific amount of time, you need a stream of income that is assured.

Annuities are particularly useful for paying for retirement and, in some situations, educational expenses.

When money is withdrawn from a tax-deferred annuity before the age of 59½, the tax code applies a 10% premature withdrawal penalty. Insurers impose fines when money is withdrawn before the annuity’s term expires.

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