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An Introduction to Annuities: How they Work

An Introduction to Annuities: How they Work

Investing in an annuity is an excellent way to secure your long-term financial future and retirement.

Suppose you are looking to control your financial future and ensure that you’ll have a promising and prosperous retirement. If these are your goals, a properly structured annuity is one of the best investment tools you can invest in to ensure you’ll succeed. With a properly designed annuity, you can appropriately prepare for your retirement years, and make sure that you never run out of money. Annuities can be built to ensure you will never lose a dime in principle, and still have guaranteed growth according to the gains accumulated through investment strategies chosen. Annuities also ensure growth without taking any risks in the market, and when appropriately structured, can have zero market risks. Annuities also grow in a tax-deferred status, meaning you can take full advantage of compounding interest. Investing in an annuity is an excellent way to secure your long-term financial future and retirement. Read on to learn how annuities work, and why it is a great investment strategy when planning for retirement!

What is an Annuity?

An annuity is an investment tool offered by insurance companies as an insurance policy. They can be structured using different types of strategies and might have particular rules and growth structures. Some annuities may offer income, while others are best used for principle growth. Annuities are typically thought of as investment tools to help get to and through retirement. Essentially how they work is, insurance companies offer a policy structure that you choose, and then you place your principle as an investment into this insurance policy. The insurance company may offer a fixed growth product or a strategy that will follow indexes within the stock market. You the policyholder invest, either a one-time lump sum of principle or add to it throughout a period. The insurance company, according to the policy’s rules, will add interest earned through the strategy chosen by you, the insured. The insurance company may offer an income from your investment, or the strategy might be growth. Whatever is the case, the annuity will be structured to fit the policyholder’s desired investment strategy. Typically the annuity contract will be for a certain period and will require you to keep most of your investment in the policy for that specified period and only allow partial withdrawals without penalties.

Safety and Security of Investing in a Properly Structured Annuity

Investing in an annuity is one of the safest investments you can make. 

One safety feature of an annuity is that there are no stock market risks when you invest in an annuity (unless investing in a Variable Annuity). Most annuities are set up so that there is only a gain potential, and when no gains are achieved, or even a loss in the stock market (if your investment is using an index strategy), there is a zero floor. This means that if there’s a gain, according to how you set up your annuity to earn interest, your annuity will grow according to the strategy’s success. If there are no gains, though, or even a loss, then the annuity will not lose any value, even gain value. If you have gained interest over time, you will never lose the increased value or the principle you initially invested.

Another safety feature of an annuity is the State Guaranty Association. The State Guaranty Association is an insurance policy for insurance products with similarities to FDIC insurance for banks. Guaranty associations are non-profit organizations, which are created by statute, to protect policyholders from financial losses and delays in claim payment, because of the insolvency of an insurance company. They can do this by assuming responsibility for the payment of covered claims that might otherwise have been paid by insurance companies, if it not become insolvent. Insurance companies that sell these fixed annuities are required to be members of the state guaranty association as a condition of doing this kind of business in the state. Guaranty associations gain funds for their operations and payment of claims through assessments against state-licensed insurance companies, and from the recovery of amounts paid-on claims from an insolvent insurance company. The funds are created in each state, to ensure that the policyholder will be paid up to their policy specifications if an insurance company becomes insolvent. This State Guaranty Association Fund serves as an insurance policy to the policyholder of an annuity and other insurance products and ensures that promised investments will be paid according to policy specifications, up to policy limits. 

What is Annuity Income?

Annuities can provide you a guaranteed income for a specified period. This period could last you as long as you choose, and could last you for your life. Annuities can come in the form of a second Social Security check that could pay you for the rest of your life, and could even be passed onto a loved one or spouse. Depending on the annuity you chose and the annuity structure you picked, you can ensure a guaranteed income payment for your selected period. 

How Annuities Help for Retirement

Annuities can help you save for retirement in the form of deferred annuities. These can help you save more for retirement and defer any taxes. They’re available in both variable and fixed structures. If you are approaching retirement and want to invest, then deferred income annuities can help you prepare. They create a future stream of income, all while helping protect your savings from market fluctuations. Even if you are currently living in retirement, immediate annuities can offer you peace of mind as a guaranteed income source for as long as you desire (as mentioned briefly earlier).

Taxes and Annuities

Annuities typically grow in a deferred tax status. This means that you’ll only have to pay taxes once you withdraw your funds from the said annuity. This structure helps you with investment growth, as you can grow your principle and interest without ever reducing growth, based on taxes that you may owe. This differs from other kinds of investments, such as bank CDs or different types of non-tax deferred accounts. This is because you don’t have to take the accumulated interest from your interest payments, to pay the taxes that you would otherwise owe, in these other kinds of accounts. This helps with faster growth of your annuity investment accounts and ensures that you can take full advantage of compounding interest.

Compounding Interest with Annuities

Speaking of compounding interest, annuities will grow according to your principle but also based on your interest accumulation. This is known as compound interest. This type of interest refers to the idea that if you put in your investment principle, and it starts to accumulate interest, the very next year, your principle will be as much as your accrued interest and total principle. These accumulations take place each year, and while you are invested in an annuity, choose a position at a tax-deferred status, meaning that there’s no limit to the possible growth of your investment.

A Summary of Annuities

Fixed annuities have so many benefits, including unlimited growth potential, safety, and security, knowing there isn’t any loss potential, due to market risk. Annuities also provide no loss in principle and overall accumulated growth. With annuities, you also get equipped with guaranteed growth, income, and tax-deferred growth for your foreseeable future.

If you are curious about annuities, check out https://www.ssa.gov/policy/docs/issuepapers/ip2017-01.html

For any more questions about how annuities work for you and your family, give Healthcare American a call to learn how to invest!

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This entry was posted on Friday, August 7th, 2020 at 10:42 am. Both comments and pings are currently closed.

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