Annuities Are Long-Term Savings Plans

How an Annuity Works

An annuity is a flexible retirement planning tool that allows your retirement savings to grow on an income tax-deferred basis option that best meets your needs for income when you retire. An annuity is often described as the opposite of life insurance- it pays while you live, and life insurance pays after you die.

Why Buy an Annuity?

There are many different reasons to purchase an annuity. One of the biggest advantages of an annuity is that it allows savings to grow without any current tax, since earnings on an annuity are not taxed until payout begins. Many others say that they like annuities because an annuity provides a steady stream of income that they cannot outlive. This is a particularly useful feature for those who do not have a defined benefit pension. Annuities are flexible. Generally, you decide how much money you want to put into an annuity and how and when you want to start the payouts. When you are ready to receive retirement income, you can convert your annuity from a long-term savings plan into a variety of payout options. In a recent Gallup survey, people who had purchased an annuity said they believed annuities:
  • Have a good rate of return
  • Are an important source of retirement security
  • Are an easy way to save for retirement
  • Can ensure a continuing income for a surviving spouse
  • Provide flexibility in how payouts are received

Selecting the Right Kind of Annuity

If you want to begin receiving income immediately, you should consider an immediate annuity, which converts an initial lump-sum deposit into a series of monthly, quarterly, or annual payouts right away. If you are years away from retirement, you should consider a deferred annuity, which delays the payout that you receive while the money that you save grows without being taxed until it is withdrawn. Tax deferred earnings are one of the major advantages of an annuity over other financial products.

Financing Options

When buying an annuity, you can pay once with a single premium or periodically with flexible-premium accounts.

Flexible Premium

- Under a flexible premium annuity, premiums are paid over a period of time, but you have the option to both vary the premium amount paid and to skip making deposits. A flexible premium is always a deferred annuity (FPDA).

Single Premium

- Immediate and deferred annuities can be purchased with a single premium payment. Retirees often purchase single premium annuities with funds received from an employer-sponsored retirement plan, the proceeds from a savings account, the case value or death proceeds of a life insurance policy, or the proceeds from the sale of a home.
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