Annuities are financial products that are mentioned time-and-again. But what are the benefits of this often-misunderstood product and why should anyone consider annuities?
Annuities for Life
The underlying concept is simple. As Investor.gov (a website run by the Securities and Exchange Commission (SEC)) explains, annuities “is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future.” That payment may be a lump sum or a series of payments.
Of course, this still leaves the question of why one should consider annuities. For many people, it makes sense to purchase annuities as part of their retirement plan. Annuities can provide a guaranteed income stream when someone needs it. As an annuity beneficiary, you are guaranteed to not outlive the income. This benefit can also be extended to your spouse.
Effectively, annuities are the opposite of life insurance. Life insurance provides a benefit if you pass away too soon. Annuity benefits are there to protect from out living your savings.
Annuities in Death (and Taxes)
Another reason an annuity may be attractive is for their death benefits. Depending on the type of annuity, if an individual who purchases the annuity dies before payout, a beneficiary may receive a specific payment. This is useful for those looking to provide financial protection for a spouse or child.
Still another benefit of annuities is in the area of taxes. There are no taxes to be paid until withdrawal. This can have significant benefits for retirees. This is because one’s tax bracket may be lower in retirement than during one’s employed years. This can yield significant tax savings.
With these advantages in mind, it is easy to see why annuities can be an attractive option. They can fit neatly within one’s overall retirement plan.
Perhaps the questions should rather be “why not annuities?”