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Basics of Annuities

 Common Annuity Terms

 

An Immediate Annuity is usually purchased at or near retirement with a lump sum investment.  The income stream begins within 13 months.  

A Deferred Annuity can be purchased over time or via a lump sum. It’s income stream begins further in the future.

A Fixed Annuity pays a fixed rate of interest prior to Annuitization. If annuitized, the payout is a fixed amount. Returns and payouts reflect the current interest environment. This can leave you vulnerable to inflation when purchased or annuitized when interest rates are low.

A Variable Annuity invests in stocks and bonds.  Contract value and annuitized income stream will fluctuate with the performance of the underlying investment "units”. There is hope that future income will increase to keep pace with inflation.

An Equity Index Annuity is a type of fixed annuity.  The interest credited is based on the performance of an underlying stock market index.  They promise protection for loss or even guarantee a 1-3% return during down markets while offering limited participation on the upside.  They are complex products that suggest greater returns than CDs or bonds might but are unable to deliver the real returns of the stock market.  They seem compelling to investors who want to participate in upside potential and avoid the pain of loss.  In practice, they are difficult to understand, can be expensive and fail to meet performance expectations.

 

Primary ways to get income from an Annuity

1) Annuitization: You trade the value of your contract for the issuing company's guarantee to make payments to you periodically for a certain period, or for your lifetime.

2) Guaranteed Income Rider gives you guaranteed income you cannot outlive and leaves you access to your account balance if needed or to leave a legacy. This Rider comes at a cost.

3) Withdrawals—no level of income is guaranteed (which was likely the point of purchasing the insurance product in the first place). Any balance remaining at death can be passed on to heirs.


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