Annuities are the type of insurance contract that exists between an individual and a financial company. Having said that, a government vehicle such as Social Security can also be classified as an annuity.
The contract defines the policy’s conditions, which typically begin with tax-deferred payments to the account, which can be made on a regular or lump-sum basis. Immediate annuities are also available, albeit they are less frequent.
Retirement Security
According to FINRA, these occur when you “use the annuity to provide a source of retirement income and your payments begin right away” (Financial Industry Regulatory Authority).
A deferred annuity will eventually give a monthly, guaranteed payout for the rest of the insured’s life. Annuities are classified into three types: fixed, variable, and indexed.
Annuities can provide a steady stream of income in retirement. Fixed income can help stabilize income throughout retirement because most retirement accounts are invested in the stock market. The annuity contract specifies how much money you would receive each month.
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Think Before Investing In Annuities
Bonds and certificates of deposit (CDs) are other popular choices for retirement income stability. CDs are insured by the Federal Deposit Insurance Corporation (FDIC), which means you will be reimbursed if the bank fails. Privately issued annuities are frequently solely backed by the insurer, thus there is no guarantee that you will be repaid if the insurer goes bankrupt or insolvent.
Annuities have received a bad rap in recent decades as a result of aggressive sales practices and a high-commission structure that may push agents to sell one product over another (regardless of which would actually be the best fit).
This doesn’t change the fact that the product can be a beneficial aspect of retirement planning, but it does suggest that you should read the fine print.
Consumers should understand how the agent benefits from the transaction, the contract’s termination alternatives, and what happens to the money when they die.