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Annuities Explained
What is an Annuity?

An annuity is a financial investment product sold through insurance companies and banks. Typically designed to pay out income, though they also offer savings with the advantage of tax deferred growth. Annuities are often used as part of a retirement strategy. Annuities are a popular choice for investors who want to focus on safety of principal and want to receive a steady income stream in retirement.
How an annuity works: After selecting the insurance company and specific product, you make an investment in the annuity by filling out an application. The application is essentially a contact between you and the insurance company which states rate of return and all benefits you will receive in exchange for agreeing to the contract terms. You will then receive payment from the annuity either immediately or on a future date depending on the specific annuity. The income you receive from an annuity can be doled out monthly, quarterly, annually or even in a lump sum payment. This is the broad concept of an annuity, however there are a vast amount of choices and products to fit an investors' specific needs. Visit our Annuity Guides for an in-depth look at the different types of annuities available.

If an insurance company goes out of business other insurance companies licensed in state must assume bankrupt insurers obligations and liabilities. Note that this protection protects fixed-rate annuity holders only, with some protection afforded to variable annuity owners. They are very similar to CDs offered by banks. Just like banks insurance companies offer different rates and returns on annuity investments.

Advantages of Annuities:

All annuities have three primary advantages: Tax Deferral, Avoidance of Probate, and a Guaranteed Income (optional) for a fixed period of time, or income for life. More specific reasons to invest in fixed and immediate annuities:

  • You need to safely create wealth for your heirs
  • You need tax-deferred growth
  • You need your principal and interest guaranteed
  • You need your heirs to avoid probate upon your death
  • You need an increased death benefit
  • You need stock-market linked gains without the downside risk
  • You have money that is designated for inheritance
  • You do not need more than 10% liquidity annually
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