Annuities: An Overview

What is annuity?

In case you don’t know what an annuity is, it is used as a means of providing an individual a steady cash flow during his or her retirement years. This is a kind of financial product sold by financial institutions that could have you all set in the future- financially. You can have a quarterly payment, monthly, or even annual. The amount is dependent on the premiums you’re paying and the duration of your payment.

The growth of the investor’s money remains tax-deferred. This means that the earned growth of the money is only taxed when the investor decides to withdraw the money and take possession of it. If, however, the investor wishes to have an early withdrawal, he or she will have to pay the insurance company penalty charges, including tax penalties.

In annuities, there’s no such thing as contribution limits. Compared to a Roth IRA or even the 401k, annuity can make you contribute any amount into your account. Aside from the earnings you get from the amount you put in, you also get interest from the earnings.

A lot of annuitants (those who buy annuities from companies, meaning, you) choose to receive monthly payments from the insurers for the rest of their lives. The monthly payments to the annuitant and his spouse will only cease when both parties are already deceased. You as the annuitant will receive money like you are receiving a paycheck. You will receive more than what you paid for if you live a longer life after your retirement. If, on the other hand, you passed away early, your contribution will be larger than what the company provided for you. And because you can choose your annuity, you can choose to pass whatever payments left to a beneficiary, should this happens to you. The good thing here is peace of mind; that you won’t have to worry about finances when you’re already retired.

Things to Watch out for

There are also a few disadvantages in annuities. First is that annuities are often sold by sales people and brokers, and the commission can be a little overwhelming, like 10% overwhelming.

The second one is the penalty charges you have to pay should you choose to withdraw your money at age, say, 59 and 1 / 2. This is called a surrender clause. This was already mentioned earlier.