An annuity is a distribution of money earned on an investment on a set schedule (quarterly, bi-annually, or annually). Typically an annuity is used as part of a retirement plan to ensure a fixed and stable income. A common form of annuities provide a retirement pension. While the retiree was working, he or she paid into a pension fund which was invested. After retirement, the return on the investment takes the form of an annuity distributed to the retiree.
Annuities are offered by Insurance companies and sold through licensed agents. The insurance company and the agent must be evaluated and licensed in your state. State insurance commissions scrutinize Insurance companies to ensure they have reserve funds in place to protect investors before granting insurance companies licenses. If an insurance company goes out of business other insurance companies licensed in the state must assume bankrupt insurers obligations and liabilities. Note that this protects fixed-rate annuity holders only, with some protection afforded to variable annuity owners.
Advantages of Annuities:
All annuities have three primary advantages:
- Tax Deferral
- Avoidance of Probate when Beneficiaries are Named
- Guaranteed Income for a fixed period of time (income for life)
More specific reasons to invest in fixed and immediate annuities:
- You seek to safely build for your heirs
- You need tax-deferral
- You need your principal and interest guaranteed
- You need your heirs to avoid probate upon your death
- You need an increased death benefit
- You have money that is designated for inheritance
- You DO NOT need more than 10% liquidity annually