Annuities are complex investment/insurance products. They often pay high commissions to the people who sell them, providing them a strong incentive to convince you it is the right investment for you.
Before you buy an annuity you need to know why you are buying it and what you expect it to do for you. Work through the five questions in this article to make sure the annuity you are buying is right for you.
1. What type of annuity are you buying?Immediate or Deferred
- Immediate: With an immediate annuity, you trade in a lump sum of money for a guaranteed stream of income. Immediate annuities can provide a fixed or variable stream of income, depending on the type of immediate annuity you buy.
Purpose Of An Immediate Annuity: People who buy immediate annuities are looking for guaranteed income and want the assurance of knowing the income will last throughout their life expectancy. They understand they will no longer have access to their principal.
- Deferred: With a deferred annuity, you deposit your money with an insurance company and let it grow tax deferred until a particular age or date that is stated in your contract. Deferred annuities can be either fixed or variable. A fixed deferred annuity provides a fixed rate of return which is guaranteed by the insurance company. Unlike a fixed annuity, a variable annuity allows you to invest your funds in a portfolio of stock and bond accounts.
Purpose of A Fixed Annuity: People who buy fixed annuities are looking for a safe investment that allows them to defer income taxes on the interest they earn.
Purpose Of A Variable Annuity: People who buy variable annuities are looking for tax deferral and often a way to "insure" their retirement income. The benefits that can be layered into a variable annuity are complex, and unfortunately many people who buy them do not understand what they are buying. All too often the tax deferral in a variable annuity is not as beneficial as it may appear to be and if you are not careful you can get talked into a variable annuities with fees that are outrageously high.