In an unsure world, annuities offer financial In an unsure world, annuities offer financial security

Published on Wed, Oct 21, 2009 by Robin Kagan, CLTC

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Are you interested in a conservative investment that has a guaranteed return?

Then annuities may be for you.

Annuities are considered conservative, but there are many misconceptions about annuities. This is largely because there are more than one type, an income annuity (also known as an immediate annuity), a variable annuity or a fixed annuity. There are vast differences between these products.

The biggest misconception is that the money in an annuity is only paid to the annuitant on the annuity contract and when that person dies, the family doesn’t get the unused funds. It is always important to designate beneficiaries on an annuity application. This can also avoid the funds going through probate.

The second biggest misconception is that your money is  “ tied up” and thus, unavailable for withdrawal for many years. Most annuity contracts allow for withdrawals, either monthly or annually, without fees. Each company is different in this regard.

When safety is of primary importance to an investor, a fixed annuity is a good choice.

These are accumulation and distribution accounts. There are different ways to fund these annuities, whether it is a lump sum or monthly additions. Typically these annuities permit withdrawals of 10 percent per year without any fees.

Annuities grow tax-deferred, which means that interest is only taxed when money is withdrawn.

Therefore, principal and interest can grow, compounding. Tax deferral is a big help to investors who currently pay tax on the interest they earn each year.

Income, or immediate, annuities are for an income that can be guaranteed for a period of time, or life or both. This can be very valuable if there is a concern about outliving your assets. The monthly income is based on age, actuarial tables and the amount deposited in the annuity. Beneficiaries can benefit when a guaranteed period of time remains after the annuitant’s passing.

A variable annuity can be subject to the ups and downs of the stock market, since it can be invested in a variety of ways. It may also have a “fixed account” option. There may be maintenance fees to consider, since the account may need to be managed.

There are different situations where one of these products would be more appropriate than another, and a knowledgable insurance agent can make recommendations only when the client’s finances are reviewed. These are not products that should be “sold.” Rather, they should be bought when it all makes sense to the client and would add financial peace of mind.

Finding out your options with an experienced insurance agent can help you decide if this is a good product for you. It would be unwise to put all of your funds in an annuity, since it is always important to have liquid cash for emergencies.

(By Robin Kagan, CLTC.
Certified in long-term care.)