Can they benefit you?

Annuities are not life insurance policies—although they are underwritten by insurance companies. Nor are they savings accounts. Annuities usually contain tax penalties for making withdrawals before age 59-1/2. Instead, they are long-term financial vehicles that could help you plan for retirement.

Annuities are a contract between you and an insurance company in which you deposit a lump sum payment or series of payments and the insurer makes payments to you over a period of time spelled out in the contract. Benefits include:

  • Tax-deferred earnings—you don't pay federal income tax on gains until you begin to withdraw money.
  • The possibility of retirement income for life. When you purchase an annuity, you can choose payouts that last a lifetime or for a time period you specify.
  • Possible protection to your beneficiary if death occurs before receiving your complete payouts. Upon the death of the owner/annuitant, any remaining annuity value will pass directly to the beneficiary and avoid the delay and expense of probate.

Deferred and immediate/Fixed and variable

There are two major types of annuities—deferred and immediate. As its name suggests, a deferred annuity generates income that is deferred to a future date. Immediate annuities, on the other hand, provide you with an immediate income. Deferred annuities can be further divided into fixed and variable annuities. Fixed annuities earn a fixed rate of interest, guaranteed for a specific period. With variable annuities, your premiums are placed in investment options you select.

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