Annuities Explained

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Investing in employer-sponsored 401(k) and 403(b) plans is important for your future financial stability during retirement. Yet, contributions to these plans are limited and may not provide enough income throughout your golden years, especially if you begin saving later on in life. As such, an annuity may be a viable option for maintaining your financial security in retirement.

An annuity is a contract between you and the insurance company by which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments beginning immediately or at a set date down the road. Keep reading to learn about the different types of annuities and the benefits of having such a contract.

Types of Annuities

There are three main types of annuities, including:

  1. Fixed—Under this annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your account is growing. It also guarantees that the periodic payments will remain at an established dollar amount. These periodic payments may last for a defined period of time or for an indefinite period (such as the lifetime of the account).
  2. Variable—Through this annuity, you choose to invest your purchase payments from various investment options (typically mutual funds). The rate of return and the number of periodic payments needed will vary.
  3. Equity-indexed—With this annuity, when making a lump sum payment or a series of payments during the accumulation period, the insurance company credits you with a return that is based on changes in an equity index. The insurer typically guarantees a minimum return that can vary.

Benefits of Annuities

Having an annuity can help you:

  • Diversify your portfolio among a number of assets and manage your portfolio
  • Avoid outliving your assets, since annuities pay indefinitely
  • Protect your assets from creditors

Plan Ahead

Look at your immediate and long-term financial needs to determine if you can afford to open an annuity. Should you have a sudden need for cash, you can usually withdraw a small amount from a deferred annuity without suffering a penalty. However, you will likely suffer a penalty if you withdraw a significant amount of money after only a few years of having an annuity. To see if an annuity is right for you, contact Price & Ramey’s life insurance team.