Annuities have been around for centuries. Kings and lords would grant an annual income to their subjects, usually issueing payments for life, and these annual payments came to be called annuities. Fast forward to today and mega lottery winnings are usually paid out as an annuity (annual installments), for a fixed period of years.
Having one or more annuities payable for your life (or perhaps your life plus the life of a spouse or other beneficiary), means that no matter how long you live, you will never run out of income. Even if you set the world record for longest lifespan currently age 126 you will still get paid.
There Are Some Pretty Obvious Advantages
This can be of huge benefit to you if you have, as most of us do, a limited amount of savings that you have to make last a lifetime. Since you don’t know how long you will live, you don’t know how long you need to stretch your savings. If you try to guess, and start spending part of your savings, you could run out of money if you live longer than you expect. With an annuity, you don’t run that risk–you get paid no matter how long you live.
If you don’t have an annuity, the only way you can make sure you don’t run out of money is to avoid dipping into your principal. But living just off the interest means you don’t have nearly as much money to spend, perhaps not nearly enough. Most people need to spend part of their savings every year to maintain anything resembling their desired standard of living. If you convert your savings into an annuity, your principal will be amortized for you, and you will receive considerably more income than you would if you just lived off the interest.
What is the Definition of a Variable Annuity
A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you at a later specified date. You can purchase a variable-annuity contract by making either a single purchase payment or a series of purchase payments.
These are lasting investments appropriate for retirement support and are prone to investment risk and market fluctuations as well as the prospect of losing the principal. Variable annuities have charges and included, although not restricted to, expense risk charges and mortality, surrender and sales levies, administrative fees, and levies for optional riders and benefits.
In contrast to mutual funds, variable annuities have more expenses and fess because of the contract and insurance charges.
Tax delayed maturity will eventually be taxed, possibly to a higher taxed category beneficiary.
Every profit is subject to taxation at regular income rates
The investment return is reduced because the death benefits produce mortality levies
Surrender fees might be important in the beginning and might carry on for several years
Variable annuities are not regarded as liquid assets because of probable IRS tax and surrender charges penalties for early withdrawals.
Withdrawals earlier than 59 1/2 years of age are liable to tax sanctions, as well as income tax on earnings.
In a number of states, state premium excise may decrease the total of value accessible for later payments.