Annuities are financial products that help you increase your wealth. Though generally, it helps your money to grow, there are certain risks you need to consider.
An annuity is a contract you can engage with an insurance company. It can either be a lump sum or a series of payments contribution. The contribution enables you to receive a pension-like disbursement in the future.
Annuities are great investments if you want a steady source of income when you retire. Retirement is exciting yet scary for some, and the possibility of not having a stable source of income terrifies them. Annuities are in place to fulfill people’s needs for a better retirement.
Typically, financial advisors say that annuities are best for people between 70 and 75, and these age brackets will allow them the maximum payouts. Check out https://www.annuityexpertadvice.com/annuity-101/ to know more about different kinds of annuities.
Although a common financial concept, many still believe in the myths and fallacies about annuities. Below is a discussion of the different annuity facts and myths:
The Facts
Here are the facts about annuities that you need to know:
Annuities guarantee lifetime income.
Annuities are financial products that you can take advantage of when you retire. The stream of income is steady and continuous. You can expect earnings and payouts throughout your lifetime.
Annuity payouts will continue even if you exhaust all of the value of your contribution. This benefit is advantageous if you want to maintain and continue your current lifestyle.
Annuities grow tax-free
One of the main advantages of having annuities is the allowance of tax-free investments. Annuities are also investments that help your money grow without any tax impositions.
You will experience tax-free growth of your money, including dividends, capital gains, and interests. The tax-free growth will be until you withdraw your annuity. Further, purchasing annuities from Roth IRA or Roth 401(k) is tax-free when you comply with the requirements.
You will not worry about your annuity’s tax payments as they will not be an issue as long as you are not severing your annuity contract.
Annuities offer different levels of risk.
All investments have risks. In annuities, you will have different options that can cater to your risk level of tolerance. When you are a low-risk taker, you can have fixed annuities which can offer steady income and interest. But if you have a high-risk tolerance, you can take out variable annuities that cater to your risk level.
Before engaging in an annuity contract, it is necessary to discuss it first with your financial advisor. Your annuity knowledge should be well and efficient before signing a contract. This way, they can give you the best options depending on your risk appetite or tolerance.
Payouts do not end even when you die, in some cases.
Depending on the terms of your annuity contract, you can assign continuous payouts to your beneficiaries. Generally, payout stops the moment the owner of the annuity dies. However, in some cases, the payout will continue according to the contract.
You can add an annuity provision to secure your family’s future, and the provisional clause can help to safeguard payouts even after your death. You can ask an insurance company for a proper computation and idea about the best annuity contract for you.
You can buy an annuity from your assets or retirement accounts.
You can use workplace retirement plans like 401(k) and 403(b) for purchasing annuities. You can also use your current assets and investments.
Using your assets and retirement accounts will be beneficial for tax-deferred investment opportunities. This type of investment opportunity enables you to maximize your earnings.
Myths
Dealing with annuities will involve many misconceptions about them. Here are some of the most common annuity myths that you need to know:
Annuities will only benefit retirees.
A misconception about an annuity is that it only benefits retirees, whereas, on the opposite, it can help savers too. An annuity is a financial contract you engage with an insurance company, and you can use it to build wealth through investing in different markets, such as bonds and stocks.
You can also use an annuity to grow your investment tax-deferred.
You will not benefit from an annuity when after you die.
Some believe that insurance companies are the only ones to benefit when the annuity holder dies. However, that is not the case. As the annuity contract will depend on your conditions, you can add the provisions you want. Such as assigning your beneficiaries to receive continuous payouts even after your death.
Your annuity payout does not end because of your death. Your family can continue to benefit from it as long as the contract provides. For instance, income annuities arrange income payments to your beneficiaries. Thus, it is necessary to discuss with your financial consultant about the best annuity contract for you.
Annuities have high charges.
Unlike this myth, many annuity types have low costs. There are different annuity types, and their prices also vary. Here are some of the annuities you might consider:
Fixed annuity
This type of annuity is pretty straightforward. It is simple and will require a lower cost.
Indexed annuity
This type is specific to a market index. Due to that, prices of contributions are slightly higher than a fixed annuity.
Variable annuity
This type is dependent on the market prices. Market prices are volatile and will require higher risk tolerance. However, interest earned is higher when the market prices are high.
Buying an annuity will keep your money tied down.
In the United States, there is a free-look period for annuities. This period is 10 to 30 days after the beginning of the annuity contract. In this grace period, an annuity holder can cancel or change their mind about the annuity contract. The insurance company will refund or return the money to you within the period set. However, you will no longer be eligible to receive interest when the annuity, for instance, earns interest.
Annuities are not flexible.
Many annuities offered today are flexible to cater to the holder’s needs. An annuity contract is personal and will depend on your capacity to contribute. With that, it can also depend on your risk tolerance for investments. You will have options to consider. Aside from that, you will also have the freedom to access your annuities without penalty.
