Annuities are one of the viable retirement tools that an individual can choose. As a form of insurance product, annuities ensure guaranteed income to the owners at periodic intervals. However, it is one of those insurance options which are somewhat difficult to comprehend. Thereby, though it offers valuable financial assistance, it’s often misunderstood and avoided. Read along to know how annuities work and how they can help you with insurance protection.
What are annuities?
Annuities are insurance contracts sold by the financial institutions or insurers. They are planned in a way that they accumulate funds, which are invested to yield high returns. Gradually the funds increase, and after a pre-determined time period the owner can receive payments from it. The payments can be arranged in a way that the annuitant or their respective spouses receive financial aid as long as they live. Or they may even be arranged to pay for a specified number of years after the annuitization phase gets over.How annuities serve as a retirement tool?
The annuity payments can be arranged to be paid at a later time upon annuitization. This makes it a valuable retirement option for the individuals. An individual can forward a portion of his income for his annuity, more as an investment. Then after a fixed number of years, he or she can receive fixed or variable payments from it, which can be used as supplementary income post retirement.How a guaranteed annuity can differ from a regular savings account?
The annuitant can arrange to receive his funds till he or his spouse dies. In that way, it yields a guaranteed return, which can’t be outlived. Whereas in case of a regular savings account, the accumulated funds may finish off before the individual passes away. However, it all depends on the living expenses of the individual and his financial requirements.What are the advantages of a tax-deferred annuity?
As the name suggests, an annuity can offer the advantage of tax-deferral. The contributions and earnings that make your annuity funds grow are not taxed till the money is withdrawn. Taxes are usually applicable only on that portion, which is considered as earnings.What happens if the annuitant dies before annuitization?
The specific terms of an annuity contract indicates the consequences of the annuity funds, if the annuitant dies before the specified term. If it’s a guaranteed savings annuity, the named beneficiaries will be entitled to the returns from it. The funds will include the principal that have been paid for, as well as the interests accrued on the sum. However, in case it’s an income annuity for which the annuitant was supposed to receive financial assistance for entire life, the beneficiary will receive the sum till the whole sum gets paid off. One another advantage that is associated with annuities is that the annuity dollars can bypass the probate proceedings, if there is a named beneficiary other than the estate. The payments will be directly forwarded to the beneficiary, without any delay. However, if the funds are withdrawn before the age of 59½ years, a federal tax penalty of 10 percent is also imposed.Blog Category