Learn if Annuities Are Right For You! 

You’ll find that annuities are typically sold by our friends, the insurance companies, so it’s not surprising that they can seem somewhat complicated and bewildering! But don’t let their fancy semantics unnerve you. As soon as you understand the gist of what an annuity is, you’ll soon be able to discern whether an annuity is the right deal for you, or an investment that will lose you money.

If you did a search for ‘annuity’ on Google, you’d end up finding many definitions and options. Unfortunately, too few sites really get to the heart of what an annuity is, and before you join the ranks of annuity buyers, you really need to know what you’re buying!

An annuity is actually a loan that you give to an insurance company. Does that surprise you? Well, they don’t happen to call it a loan; they call it an ‘insurance product’. Insurance is something that you’d purchase to protect you if something bad was to happen.

A bond is a loan that you make to a company and they pay you interest on it over the years. In the instance of bonds, the debt is actually secured against the company. So if the company was to go bankrupt, then you would be one of the creditors waiting to get paid. Okay, here comes the part that will make your head ache: by labeling an ‘annuity’ as a product, you are put way back in the line if the company does go bankrupt. You’ll find that this will vary by state law, so be careful. But an annuity is only going to be as good as the company that’s selling it to you.

If you imagine an annuity as a loan, then understanding the various types that are available to you will be somewhat easier. When you choose a ‘type’ of annuity, you are basically deciding on a degree of risk with which you are happy to take. You may choose to be assertive, by buying a ‘variable’ annuity, or perhaps a little more cautious by buying a ‘fixed’ annuity.

There are numerous regulations that happen to govern annuities, at both the state and federal level. These regulations will influence how you will be repaid. Your financial planner will be more than happy to help you understand this. Before you buy an annuity, you need to research it as you would with any other important investment. You knew what you were getting when you brought you’re car, and listened carefully when you were buying your house. Be sure to read carefully your annuity agreement.

As an annuity is an investment, you’ll find that you will be required to pay taxes on your gains. However, because of the federal government and a number of lengthy laws, your gains will typically not be taxed until you have retired and begin to receive your payments. Because your retirement income is going to be smaller than your working income, your taxes will also be lower by paying them during your retirement.

Furthermore, not all of your payments will automatically be regarded as ‘income’. Similar to your mortgage payments, a part of every payment is principal and part is interest. If you were previously taxed on the principal, then you won’t be taxed yet again on this. Tax laws do vary each year, so you’d be well advised to check with a financial advisor.

An annuity is an investment, and just like any investments, some will be better than others. Always study everything carefully and think about what you are buying and you’ll be fine.

For certain individuals, an annuity is the solution to their financial worries during retirement. For others, an annuity is a poor deal. Unless you are a CPA, then you probably won’t have any idea which bracket you come under. That isn’t a problem. Just by talking to somebody who does know will soon reveal your best approach.