Main types of annuities
Variable annuities invest clients’ funds in one or more sub-accounts that operate similarly to mutual funds. The amount of payments in this case depends on the results of investment activities.
Fixed annuities guarantee payouts but earn minimal interest for their owners.
Indexed annuities depend on the state of a particular index, for instance, the S&P 500.
Annuities can be immediate, with payments made immediately after the contract conclusion or deferred with payments made 10-15 years after the policy purchase.
Advantages of annuity
In a time when employers' pensions have taken backseat, annuities can offer policyholders regular monthly payments.
Annuities allow not only receive regular payments, but also get a life income.
Money invested in annuity can grow without paying taxes during the reporting period. The owner of the annuity pays taxes only after the fund withdrawal. A one-time withdrawal of money is taxed on the entire amount of capital gains.
Some annuity contracts, usually indexed annuities and those with fixed income offer a guaranteed return option.
A joint retirement annuity provides an opportunity for close relatives or spouses to pool their savings and receive life benefits without waiting for the official retirement. Married couples can use this product if one spouse does not have enough pension savings to buy a retirement annuity, and the other has a surplus.
Disadvantages of annuity
Annuities have several drawbacks, including the high cost of contracts. The high cost of the policy reduces the future income of its owner, especially with a variable annuity, the value of which depends on return on investment.
It will be expensive to opt out of an annuity contract. Some insurers make it difficult to get out of an annuity by charging high repayment fees. In some cases, these fees can be as high as 10% of the policy value.
Retirement annuity contracts are difficult for a normal person to understand. Since financial advisors earn commissions by selling annuities, they have no motivation to list the risks in detail to potential buyers.
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