What is an annuity?

What is an annuity? Our go to adviser Google gives us the following definition of an annuity, “a fixed sum of money paid to someone each year, typically for the rest of their life.”

Just as with life insurance, this definition is correct and in its simplest form. However, companies that we work have a wide range of annuities to help in many, many specific cases. Basically you set up a target value fund, which you pay into and you set a maturation date to it. Another aspect you define is the payout period. It can be a lump sum, a certain term, where the longer the payout term, the lower the monthly payments or you can even set up an annuity to be paid our over the lifetime of the beneficiary.

Annuity tax advantage

Annuities grow tax deferred. Meaning that the earned interest during the accumulation phase is not subject to income tax. This is the primary reason for people putting money into an annuity. The steady stream of income is more of a secondary point of interest.

Pitfalls

Before setting up an annuity you have to consider the financial strength of the life insurance company writing the contract. Annuities are not FDIC insured, so choose wisely with whom you set one up! There have been 62 cases of insolvencies since the collapse of the Executive Life Insurance company in 1991. Annuities written by life insurance companies are subject by state laws. These laws are generally similar with differences in total amounts of required protection. The protection ranges from $100,000 to as high as $500,000 in New York, but is not by any government agency or insurance. Annuity holders are protected by a guaranty association, which steps in when an insolvency occurs.

Since there are so many variables involved, the best way to set up an annuity is through a personal meeting. Give us a call or drop us a line.

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