ANNUITIES |
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What is an Annuity? How does it work? What can it do for you?
an·nu·i·ty
əˈn(y)o͞oədē/
noun
plural noun: annuities
əˈn(y)o͞oədē/
noun
plural noun: annuities
- a fixed sum of money paid to someone each year, typically for the rest of their life.
"he left her an annuity of $1,000 in his will" - a form of Insurance or investment entitling the Investor to a series of annual sums.
- "an Annuity plan"
annuity you ask?
An Annuity is simply a Savings Account with an Insurance component that typically offers more guarantees and options of guaranteed lifetime income. An Annuity pays out a stream of payments to an individual, which primarily is used as an income stream for Retirees. Annuities are created and sold by Financial Institutions, which accepts and invests funds from individuals, and then upon Annuitization, issues a stream of payments at a later date in time. The period of time when an Annuity is being funded and yet before payouts begin is referred to as the Accumulation phase. Once payments commence, the contract is in the Annuitization phase.
Annuities can be structured according to a wide array of details and factors, such as the length of time that payments from the Annuity can be guaranteed to continue. Annuities can be created so that upon Annuitization, payments will continue so long as either the Annuitant or their Spouse (if survivorship benefit is elected) is alive. Alternatively, Annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the Annuitant lives. Yet in California though, not more than ten years of payment payout. Also, Annuities can begin immediately upon deposit of a lump sum of monies, or they can be structured as deferred benefits.
A criticism of Annuities is that they are illiquid (not liquid and easily accessible). Deposits into Annuity contracts are typically locked up for a certain period of time, known as the Surrender period, where the Annuitant would incur a penalty if all or part of that money were needed and touched. These Surrender periods can last anywhere from 2 to more than 10 years, depending on the particular product. Surrender fees can start out at 10% or more and the penalty typically declines annually over the Surrender period.
annuities - IN A NUT SHELL
Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of longevity risk, or outliving one's assets. Annuities can also be created to turn a substantial lump sum of monies into a steady cash flow, such as for winners of large cash settlements from a lawsuit or like those winning the lottery. Defined Pensions and Social Security are two examples of lifetime guaranteed Annuities that pay Retirees a steady cash flow until they pass-away, or until their Spouse passes-away as well.
types of annuities
Some of the most common types of annuities are:
Immediate
Immediate Annuities, also referred to as single-premium Immediate Annuities or SPIAs, allow Investors to lock in a high interest rate to accrue interest over time. People approaching retirement are the largest segment of Immediate Annuity buyers because the Annuity begins disbursement within one year of purchase. For this reason, an Immediate Annuity must be purchased with a lump sum of monies. For example, a one-time payment of $200,000 could guarantee a Retiree a immediate monthly income of $1,000 until their death as lifetime income.
Deferred
A deferred Annuity distributes income years after it is purchased. This waiting period is called an Accumulation stage, when Annuitants can make principal payments and the principal grows tax-deferred. Annuity distributions can be lump-sum payouts or periodic payments. For example, an Annuitant at the age of 60 can make gradual premium payments that grow tax-deferred over a course of years. Once the Annuitant reaches the age of 85, an Insurance company will begin disbursing periodic payments until the Annuitant’s death.
Fixed
If you own a Fixed Annuity, the amount you will receive every month (or year, depending on the scheduled distribution) is predetermined and will not change. This limits growth, but does provide security.
Variable
If you own a Variable Annuity, your returns are tied to the Stock Market and how the Issuer invests your money. You have the chance to receive a bigger return, but you also take on a bigger risk as well.
Immediate
Immediate Annuities, also referred to as single-premium Immediate Annuities or SPIAs, allow Investors to lock in a high interest rate to accrue interest over time. People approaching retirement are the largest segment of Immediate Annuity buyers because the Annuity begins disbursement within one year of purchase. For this reason, an Immediate Annuity must be purchased with a lump sum of monies. For example, a one-time payment of $200,000 could guarantee a Retiree a immediate monthly income of $1,000 until their death as lifetime income.
Deferred
A deferred Annuity distributes income years after it is purchased. This waiting period is called an Accumulation stage, when Annuitants can make principal payments and the principal grows tax-deferred. Annuity distributions can be lump-sum payouts or periodic payments. For example, an Annuitant at the age of 60 can make gradual premium payments that grow tax-deferred over a course of years. Once the Annuitant reaches the age of 85, an Insurance company will begin disbursing periodic payments until the Annuitant’s death.
Fixed
If you own a Fixed Annuity, the amount you will receive every month (or year, depending on the scheduled distribution) is predetermined and will not change. This limits growth, but does provide security.
Variable
If you own a Variable Annuity, your returns are tied to the Stock Market and how the Issuer invests your money. You have the chance to receive a bigger return, but you also take on a bigger risk as well.
benefits to annuities
Some of those benefits include:
- Long-term security
- Tax-sheltered growth
- Safe and reliable investment
- Account for longevity
- Avoid probate
- Adjust to inflation
- Care for beneficiaries
- Structure payments around planned expenses
- Maintain an affordable retirement lifestyle
- Provides Lifetime Income
- Provides Guaranteed Income for life (and Lifetime Income for your Spouse upon your passing)
Call Western States Investments to find out if an Annuity is right for you.
Call (951) 371-7608 today!
Call (951) 371-7608 today!
