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What Should I know About Annuities?

An annuity is an investment product issued by an insurance company that provides you with guaranteed periodic payments in return for your initial investment. The simplest way to think of annuities is as a loan you’re making to the life insurance company. You give them a large lump sum of money and they pay you back over time in installments with interest.

How Does an Annuity Work?

You purchase an annuity by paying a single lump sum, or in some cases, by making periodic payments over time, such as through payroll withholding. The insurance company then invests your payment so the annuity earns interest. Depending on the type of annuity you choose, that interest may or may not change the payments you receive or the length of time the annuity pays.

Why Would I Buy an Annuity?

You buy an annuity because you want a predictable, guaranteed source of income in the future that isn’t subject to market fluctuations. 

The primary advantage annuities have over other investments such as stocks, bonds, and mutual funds is the predictability and guaranteed income they provide. With a simple annuity, the only way your payments will ever go down or stop early is if the issuing company were to become completely insolvent.

Who Buys Annuities?

Annuities are typically purchased by retirees and those planning for retirement. They’re also sometimes purchased by people who come into a sudden windfall, such as winning the lottery or receiving a large legal settlement, and by people when making wills. 

You probably wouldn’t want to leave children a large sum of money with no restrictions, so an annuity would provide a good way to give them a safe, guaranteed income for many years.

Are Annuities Better than Stocks and Mutual Funds?

Annuities are neither better nor worse than stocks, bonds and mutual funds; they serve different roles. 

Annuities provide a safe, predictable future income. They aren’t usually purchased with the expectation that they will gain value like stocks and mutual funds are. They are somewhat similar to bonds, but bonds can be traded on the open market at any time while annuities cannot.

What If I Die Before I Receive All the Payments?

Many annuities offer optional riders that provide a death benefit that allows a spouse to continue receiving payments if the owner dies, or even to accelerate payments if the owner is diagnosed with a terminal illness. This is something you should carefully consider and discuss with your insurance agent when buying an annuity.

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