Investors purchase their annuity product by paying a lump sum of money or a number of periodic payments to an insurance company. The insurance company then provides the individual with tax-free growth of their funds. The rate in a fixed account annuity can be guaranteed for a certain period of time.
The account value in a variable annuity will change depending on how well the portfolio performs. The annuity can only be invested in specific investment types and can change between fixed investments to common stock arrangements.
If the individual elected the life annuity option, then the payments from the annuity may continue for the duration of their life.
The size of the payment is determined by the account value at the time of distribution, and the duration of the payment period. Life annuity payments will generally be smaller than would the equivalent fixed period payments.
There are various policy options that may allow you to extend the life on the contact beyond the life of the account holder. With the right options, your children or spouse may be able to continue your options for the rest of your life.
It is important that you careful evaluate each of the different characteristics and expenses of a variable annuity account before you commit to investing. Your contract data will have this information and will inform you of anything that you need to know before investing. If something doesn’t seem right with the contract, make sure that you have it sufficiently answered before you commit to purchase the annuity.
Because the earned income is not taxed until you begin withdrawing the money (presumably at a much lower tax rate), your funds accumulate much faster than they would if they were taxed.
The part of the annuity that is makes it an insurance product is partly due to the guaranteed monthly income payments for the duration of your life (or specified period). This can significantly lower the stress of allocating retirement income. Additionally, if you should happen to die before the contract expires; your heirs may be able to receive the remainder of the account up to the value of the premiums paid in.
Withdrawals or loans will reduce the value of the contract as well as reduce the death benefit. There may be additional costs associated with options or features of a variable annuity that are not typically associated with other investments. Please check the prospectus for details on costs and conditions. The prospectus can be obtained from the financial representative offering the product.
The world of fixed index annuities can be rather complicated. For more information on these insurance products, take a minute to check out Luke Murray at The Fixed Annuity Guide.