Understanding annuities as a retirement option can be puzzling as they continue to confuse those who are introduced to them by a salesman. This article aims to tutor you in the basics and explain annuities in a way that you understand what they are all about and are able to make an informed decision when the time comes to lay out your money.
If you are needing steady income later in life when the paycheck dance, using annuities could be a viable option to help you live out your retirement savings. Make no mistake, though, this is an investment with inherent risks based on potential reward. With that said, here are six options to consider and to help answer the question, "What are annuities, anyways?"
1. Life Income. This option guarantees that no matter how long you live, income will remain steady. The money will never run out until you die or the company does. The amount of income is dependent on your age when payments start as well as how much you invest in. Keep in mind that if you die early on, the annuity company keeps the rest of what you put in.
With these types of annuities, the gamble is that you are going to live longer and collect more money than you put in vs. the insurance company's thinking that you will die sooner and they will have to pay out less.
Statistically, the insurance company wins and keeps the rest of profit. So, stay healthy and keep up on your understanding annuities learning.
2. Guaranteed Term. It guarantees the policy benefits will last a specific number of years, usually 10 or 15. If you die sooner, your beneficiary will finish out the payments. Be sure to designate one.
3. Immediate Single Premium. Once you make your first premium payment, the pay-out phase begins immediately. I know what you are thinking, but the kicker is the purchase needs to be done with a very large sum. By combining the single premium immediate option with a life income option described above, you will receive payments immediately for life. Of course, there is always a cost for the company to make a profit, so check with a reputable an agent for the fees involved.
4. Guarantee Return of Principle. Choosing this guarantees the return of your principle (original investment) without regard to how much you paid in. Again, if you combine with the life income option, your beneficiary will receive the lump sum principle balance.
5. Joint Life. Set up to account for both you and your spouse's life expectancy, the money you receive will be less then the regular life option (first one described above). On the other end, you remaining funds to pay directly to the spouse.
There are even some annuity joint life policies allowing for the continued investment into the annuity. This allows the retirement fund to be built for later use and will last as long as the spouse does.
6. Term Certain. It is possible that you wish to have your monies last 15, 20, or 30 years. If so, then using this term certain option allows you to specify how long you will receive the money. The inherent advantage is that you are stretching your money further into retirement. One more advantage is that your beneficiary will continue to receive payments for the remaining length of the policy's term after you die.
Sorry to break the news, but yes, you will die. With some careful planning, though, you could use an insurance plan to help you stretch your retirement dollars and/or help your family when you are gone. Be aware, though, that even with all of the actual and perceived rewards when purchasing among these different types of annuities, it is an investment with commission fees and inherent risks.
The key to understanding annuities is to know what you are purchasing beforehand. Use this article that helps explain annuities as well as your life insurance agent to ensure you are making an informed decision.
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