Over the lifetime of an insurance policy, individuals pay in large amounts of money, which often just sits there, waiting for the worst to happen. Annuity insurance offers an alternative, allowing insurance funds to perform and actually do something productive. With proper planning, annuities can pay out more than was put in by the annuitant or policy holder, making it sometimes the smart alternative to traditional insurance.
What Annuities Do
Annuity insurance is a form of investment insurance that can pay out before the policy holders death, making it a form of longevity insurance rather than strict life insurance. Annuitants can choose to invest a large amount of money or commit to a series of regular payments, which will in turn be paid back out at set rates later. Some may choose to invest a large lump sum that will then be payed out over the course of the rest of their life, serving as a source of income for retired individuals. Others may prefer a series of payments over a long term to be paid out at a designated later date. Policy holders can then earn money on these investments at a high interest rate, making it more profitable than mere savings.
Fixed Versus Variable
Individuals who choose to invest in fixed annuity insurance give a large sum of money to the insurance company and negotiate fixed amounts to be returned to them monthly over a specified amount of time, even unto death. These payouts can begin immediately or can be deferred, depending on the desires of the annuitant and the contract. Variable annuity insurance marries an insurance contract with an investment. Payouts are determined by how well the investment performs. These investments are tax-deferred, meaning taxes are not paid until the money is withdrawn.
Benefits of Annuities
Annuities have a number of advantages over traditional investments. First of all, as noted above, taxes are deferred on annuities and any interest made on that investment. Also, depending on the contract, there can be guaranteed rates of return on annuities that are not possible with other forms of investment. Finally, some annuities can be paid out over the lifetime of the annuitant or policy holder, allowing for small monthly payouts to serve as income, while the remainder of the policy holder’s money continues to earn interest and the benefits of an investment.
Disadvantages of Annuities
There are, however, some drawbacks to annuity insurance. First, the guarantees must be paid for in some way; the money paid out on the back end of the contract does not come from thin air. The policy holder must guarantee that he or she will fulfill the contract, whether by paying the money in a large lump sum or in a series of payments over time. There are also a number of rules imposed by the IRS that dictate how money can be paid out of an annuity. The payments are often taxed or may involve penalties if taken out too much at a time. Investment experts advise that for the young and healthy, annuities are not the best option as other investments provide higher returns in the long run.
While not made for everyone, annuity insurance can provide a great opportunity for older individuals who want a way to both manage their money but also earn a return on their income. For those with large lump sums that need to be managed, annuities can provide a safe and reliable way of returning more than is originally put in.