Annuities are complex investment and insurance products that take time to understand. 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. Answer the question below, and then take the time to learn and ask all the relevant questions about an annuity before you buy one.
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.
Before you buy an immediate annuity consider alternatives. Read:
- 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.
- Fixed annuities can make good safe investments. You may want to compare them to other safe investment options before you buy. Read Making Safe Investments.
Purpose Of A Variable Annuity: People who buy variable annuities usually do not understand what they are buying. The tax deferral in a variable annuity is not as beneficial as it may appear to be, and more often than not, the fees inside variable annuities are outrageously high.
Before you buy a variable annuity consider alternatives. Read:
