Insurance companies have been promoting annuities as one of the best investment tools available in the market. However, many people have no idea how annuities work. Keep reading to learn more about retirement annuity.
An Overview of Annuities
In simple words, an annuity is an insurance product that gives one a steady stream of income for a specified period. In most cases, this period runs for the rest of one’s lifetime. To enjoy this benefit, you have to fork out a specified amount of money as a series of payments over time or as a lump sum. Money from many clients is pooled together and invested in various sectors to generate a regular income immediately or in the future.In the insurance industry, an”immediate annuity”allows one to start receiving a regular income after a few weeks, in about 30 days or so. On the other hand, a “deferred annuity” allows one to start receiving an income at some point further down the road rather than immediately.
Pros of Retirement Annuity
To start with, deferred annuities are the right investment tools for people who want to build retirement nest eggs and worry about taxes later. In addition, part of the income received after annuitization is considered capital return. As a result, it does not attract taxes. Secondly, annuities offer substantial mortality credits to the elderly. According to a Bankrate article, the older one gets, the bigger the mortality credit.
Cons of Retirement Annuity
Firstly, annuity fees and expenses can be significantly high compared to other investment options like mutual funds. A CNBC article reckons these fees can be as high as three percent annually or even more. Secondly, insurers are the only annuity guarantors, which means investors should not expect the FDIC or any other government backed financial body to come to their rescue if their insurer goes bankrupt.
An annuity should provide one guaranteed income for life. Benefits include deferred tax payments while cons include high fees and expenses.