What Are Annuities and Do You Need One?

What are annuities? Annuities are a kind of investment created by insurance companies. Think of how a bank offers a CD to raise money and be able to make loans and such. An annuity is much the same thing, a revenue generator for the insurance companies.

But what are annuities?

Think of an annuity like a kind of account, joint, single, IRA, Roth IRA, 401K, 403B... Annuity. What is in the annuity is what makes them so much different. There are fixed rate options kind of like a CD and variable options kind of like a mutual fund. Think of the annuity like a box. What is in the box is how you profit from the annuity.

When you open the box you are opening yourself to tax liability. You will taxes on any untaxed portion of your withdrawal. The taxes are at earned income rates. An annuity is considered tax-deferred which is better than fully taxable but is not tax-free.

Annuities also have surrender charges. A surrender charge is a fee that is charged if you withdraw more than the free amount each year. Usually, an annuity has a declining surrender charge which means that each year the charges will slowly decrease. Once the surrender charge schedule is over then there are no more charges. Be sure to carefully study the surrender charge schedule before investing.

Do you need one?

When you start understanding what annuities are used for you will begin to realize there are a vast amount of uses for the insurance product. Most of the time, they are used for a safe place to put money to immediately or eventually begin to draw an income from. Think of it like taking the interest on your CD at the bank, same idea although it is not a CD.

If you need a regular income or a guaranteed income then the fixed options would be great consider adding to your portfolio. If you are looking for more of a growth option with some guarantees, the variable or the equity indexed option might be better for you.

One of the much sought after benefits of annuities is the income benefit rider. The rider provides a guaranteed income stream without losing access to principal. It is a great way to create a base level of income from which to plan your retirement.

What are annuities good for in your portfolio?

Fixed annuities provide safety and income. Variable annuities can provide growth, check the fees first, along with some guarantees. Imagine a guarantee that says you could always get a certain amount of income when you wanted to start taking it and in the meantime your investment could grow in value with market like returns. It is a pretty nice feature that a lot of annuities have now.

A combination of annuities creates a basis of diversification in your portfolios. Concepts such as annuity laddering and income guarantees are possible while create a safe portfolio with zero chance of loss.

Annuities can be a great addition to your portfolio if you are looking for safe and secure retirement income in the future. They are not right for everyone. Be sure to consult with a competent advisor or insurance agent before moving any of your current investment money.

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