Annuity LessonWhat is an annuity? It’s an agreement for one entity to pay another a stream or series of payments. Usually insurance companies write them but a charity or a trust can. Categories: Fixed or Variable Deferred or Immediate Fixed Period, Fixed Amount, or Lifetime Qualified or Nonqualified Tax status Single Premium payment arrangement or flexible premium payment Features: Tax Consequences Most investments incur capital gains tax each tax year. However, earnings, capital gains and income from annuities aren’t taxable until you withdraw money. 401Ks and IRAs offer the same tax deferral but there is a limit on the amount you can contribute on an annual basis. With an annuity there is no limit on the amount you can contribute. It’s a lot easier to withdraw funds from them than from 401ks and IRAs. Asset Protection If you are receiving payments from an insurance company the best a creditor can do is collect the payments as you receive them because technically the payments that you made to the insurance company belongs to the insurance company not you. The creditor can’t take the money you paid. Some state laws and court cases also protect some or all of the payments. Your money in tax-favored retirement plans, such as IRAs and 401ks are generally protected. Of course one of the best ways to protect your assets from creditors is to pay your bills on time. However, anybody can run into tough times when they have problems paying their bills. You have to be careful because when this happens to you there are many companies out there that promise to help you fix your credit but in reality they are just after your money. Investment Options You can invest in a fixed rate plan which would earn a fixed interest rate, just like a bank Certificate of Deposit (CD). A variable rate plan would invest in stocks, bonds or other mutual funds. Some may offer a feature that guarantees your investment will never fall below its value on its most recent policy anniversary. This would be referred to as a floor. Income Options Because these instruments are similar to life insurance policies you can receive payments for the rest of your life. They accomplish this by taking money from your investment, your investment earnings and from the money from other’s who didn’t live as long as you. Like insurance companies they use actuarial tables to forecast your average life span to determine how much to pay out. When they guess right they win and when they guess wrong the annuitant wins. Over the long run they always come out ahead. Benefits to Your Estate You can purchase a guarantee period with your annuity so in the unlikely event you die immediately after your payments start your heirs can still get your money for a specified period usually 10 to 20 years. Another benefit is annuity payments that pass on to beneficiaries are not subject to probate or a part of your will. For Additional Annuity Information Visit Annuities-Financial-Planning.Com
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