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How Does an Annuity Work?
An annuity is when the risk of the owner, or annuitant, is transferred to an insurance company. Like other types of insurance, you pay the annuity company premiums to bear this risk. You can choose a premium that consists of a single lump sum or a series of payments, depending on the type of annuity. The premium-paying period is known as the accumulation phase, because unlike paying other types of insurance, the premium payments eventually stop. When this happens, your contract is said to enter the payout phase and the annuity can start paying you.
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Types of Annuities
Variable annuities are long-term financial products designed for retirement planning that allow you to invest in the market. Variable annuities provide you with growth potential when the market is up, but can also mean you can lose money when the market drops. It may be possible to buy a “living benefit rider” for an additional fee that can provide protection if the market drops and guarantee income for life that will never go down.
Fixed deferred annuities guarantee your premium payment and guarantee a fixed annual rate of return for distinct periods of time until you are ready to start getting payments.
Immediate annuities allow you to turn a lump sum of money into a stream of guaranteed payments that can last for your lifetime, or a set period of time, depending upon your preferences.
Deferred income annuities allow you to take money that you have today and turn it into a guaranteed stream of lifetime payments in the future.
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An Annuity is Different from Life Insurance.
Although an annuity can be used to provide similar benefits that life insurance does, they still have two different missions. Because an annuity is an investment contract, the qualifications aren’t as strict as they are for life insurance. As you may know, a health-related condition can make qualifying for life insurance difficult or more expensive. Contrarily, an annuity doesn’t prohibit you from getting a premium and might be a really good alternative. Name your spouse as a beneficiary and the contract will automatically pass to him or her after your death.
Some annuities also offer death benefit riders that can pay out a bit more than others. With an annuity, you won’t get as much death benefit as a life insurance policy, but you will get some.
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Not All Annuity Payments Expire When You Do.
People are typically more familiar with the concept that the annuity payments will cease once the owner dies, but that isn’t the only option.
You can have the payments continue until the end of your spouse’s life, if he or she happens to outlive you. There is also the option where you can buy a period-certain annuity, which continues to make payments for a minimum number of years, even if you die. The point is that many people believe that when you buy an annuity, your money is lost forever if you die within the first few years of receiving payments. However, you can choose what’s best for your situation.
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Annuities are Only as Strong as the Companies That Issue Them.
Unlike money in a savings account, annuities are not protected by the Federal Deposit Insurance Corporation (FDIC), or any similar agency. With that being said, insurance companies can fail to properly do what you trusted them to do. A failed insurance company can wipe out your annuity payments.
Therefore, the annuity you buy is only as safe as the company that issued it. When shopping for an annuity, look for the highest-rated insurance companies and consider splitting your money into several annuities issued by several different companies.
Care Financial is a privately owned and operated business providing families, individuals and businesses with comprehensive wealth management strategies. Contact us online at www.carefinancialonline.com or call us at 251-633-7122.
