How Do Annuities Work?

Annuities don’t have to be as complicated as many people think. Understanding the basics of how annuities work is fairly straightforward. 

Below we discuss the essential aspects.

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How Do Annuities Work?

An annuity is a long term contract purchased from an insurance company to help you grow your retirement income.

Investor.gov puts it like this: “An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. You buy an annuity by making either a single payment or a series of payments. Similarly, your payout may come either as one lump-sum payment or as a series of payments over time.”

Loading Your Investment

There are two phases of annuity, accumulation, and distribution. The accumulation phase builds your investment through scheduled premium payments. Depending on the type of annuity you choose, you’ll have one of two ways to load annuity funds. 

Immediate Annuities form through a single, one-time premium payment. All the benefits of your investment are immediately available, which means you can immediately begin taking income payments.

Deferred Annuities form through a series of premium payments in which loads your annuity over time. Income benefits from your annuity will begin after the accumulation phase.   

Understanding Interest Rates

Both immediate and deferred annuities offer fixed or variable interest rates.

Fixed Annuity have guaranteed interest rates at which your investment grows. Therefore, you will know exactly how much retirement income your investment will produce before making your annuity purchase. Fixed annuities offer higher yields than traditional low-risk investments such as Bonds or CDs.

Variable Annuity have interest rates that fluctuate depending on market performance. They offer the potential for higher returns; however, they also risk due to market exposure.

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How Do Annuities Benefit Those In Retirement?

There are two further categories of annuities, non-retirement annuities, and retirement annuities. Also known as Qualified and Non-Qualified Annuities.

Qualified Annuities have tax advantages that help increase your income through retirement. When you make your annuity part of a qualified retirement plan, you can delay paying taxes on your investment. The tax benefit for qualified annuities allows your money to grow and compound at a faster rate. 

Non-Qualified Annuities are not part of a retirement plan and do not receive special tax benefits. You pay taxes on the capital gain of your investment once you begin taking income payments.

How Do Annuities Work After Death?

Most annuity contracts include a death provision that allows leftover funds to go directly to a named beneficiary. We help you customize your contract to detail what should happen to your remaining funds after death.

How To Purchase an Annuity

There are two paths to making an annuity purchase. Buyers can go directly to an insurance company, or they can choose to work with an independent agency.  We highly recommend the latter.

Individuals who go directly to the insurance carrier receive offers from only that particular carrier and will quickly experience a pressurized sales situation. Smart shoppers who choose to work with an independent agency will have the luxury of comparing all the top annuity offerings before investing. We eliminate sales pressure because we do not work for the insurance company; instead, we work for YOU.

We help you find your best annuity investment regardless of carrier.
Our team of experts helps you quote and compare annuity companies nationwide. As a result, you’ll save time and find better investment opportunities.

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