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An annuity is an agreement between an insurance company and an individual to cover specific situations, including long-term care costs, lifetime income, and principal protection. The individual is supposed to pay an agreed-upon sum paid annually as the insurance premium.
You may ask yourself why it's so necessary to purchase an annuity. Well, having an annuity will guarantee you a lifetime income regardless of the number of years you breathe. It's an ideal retirement strategy, especially if you don't have children that could help you in your later years of life. The best thing about annuities is they have no contribution limits, allowing you to save what you desire. Purchasing an annuity will give you the freedom to invest your other assets with confidence since you're certain there's guaranteed income upon retirement.
An annuity transfers the investment risk from the annuitant to their insurance company. Contrary to other insurance types, you don't have to pay your annuity premiums indefinitely. The moment you stop paying premiums, your insurance company triggers the payout phase clause. It means you'll start receiving payment for what you invested. Depending on the payment structure listed in your annuity contract agreement, you may make a single payment or decide to make a series of payments.
The good thing with annuities is they have flexible payment structures for subscribers. There are different annuity policies. The payment structures can include triggering payments for a set number of years to you plus your heirs for your lifetime or until your demise.
Your annuity company can disburse your payment in a lump sum, monthly, or quarterly. It can begin paying you immediately after you stop paying premiums or postpone the payments for years or even decades. This will depend on your contract agreement.
The two main types of annuities are immediate and deferred, and within these two categories lie the fixed and variable annuities. An immediate annuity will start disbursing income immediately after you halt premium payments, while a deferred annuity provides your income later on.
Some people find it difficult to come up with a precise variable annuity definition. A variable annuity contract combines the growth probability of the stock market with the constant retirement income that annuities offer. It lets you select the most suitable securities you think will provide good returns to you in the future.
Fixed annuities deliver guaranteed retirement income payments to investors regardless of how the markets fluctuate. In a fixed annuity contract, you may pay one or multiple premiums to your annuity company, and the provider honors its part of the deal by offering you fixed returns according to the contributions you make.
Another type of annuities is the fixed index annuity. It's a long-term saving and tax-deferred income that offers principal protection when the markets go down and offers an opportunity for growth to the investor. These annuities will give you a higher percentage of growth probability than fixed annuities. They also have a less potential return and risk of investment than variable annuities. Your returns for this annuity are based on how an underlying index such as the S&P 500® Composite Stock Price Index performs.
While your money is in an annuity, you're not supposed to pay tax — a scenario commonly referred to as tax-deferred. You'll only start paying taxes after you withdraw your disbursements.
If you pay premiums for your annuity using pretax dollars, also called a qualified annuity, all the amount you withdraw is taxed at your ordinary-income tax rates. However, if you have the non-qualified annuity, no tax will be charged on part of your withdrawal that represents your original principal's return. In a non-qualified annuity agreement, only your earnings will be taxed.
Although annuities are good investment opportunities, they aren't for everyone. It is best to discuss the potential benefits of annuities with a financial professional.
If you're looking to get an annuity the first time, don't navigate this difficult process alone. Work with a professional that can review your options with you. Garlesky Insurance Company has all it takes to help you achieve your annuity investment dreams. Call us today, and we will offer you personalized solutions, including giving recommendations on whether investing in annuities is ideal for you.