Buy an Annuity - what is a annuity

An annuity is a fixed or variable investment contract, issued by an insurance company, that provides income payments to an annuitant or beneficiary, beginning immediately upon issuance of the annuity (immediate annuity) or at a future date (deferred annuity). The income can be paid until the death of the annuitant, for a specified number of years, or as a fixed amount until the funds are depleted.

There are generally two stages in the life of an annuity. The accumulation phase, during which contract values builds, and the payment phase, when the contract values are distributed.

Ultimately, the power of a tax-deferred annuity is the ability to generate income for as long as you live. Combine lifetime income with tax-deferral and no maximum investment amount, and you can use a tax-deferred annuity to create your own personal "pension" plan.

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Before You Consider to Buy an Annuity, ensure that...

  • You have established an emergency fund to cover your living expenses for at least three to six months.

  • You can comfortably meet any planned expenses (such as a down payment for a home or planned renovations) with other funds.

  • You do expect to keep at least two thirds of this money invested until age 59½.

  • If you are considering investing in a variable annuity, you are contributing the maximum amount you can to your IRA as well as to any tax-deductible plans available to you (e.g., 401(k), 403(b) or Self-Employed 401(k)/Keogh).

  • If you can't confirm all of the above strategies, an annuity may not be right for you at this time.

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Buy an Annuity: What are the benefits of an annuity?

As we live longer in retirement, the concern becomes ensuring a continued income for life. An annuity is the only product, which has the ability to provide you with a lifetime income guarantee. However, lifetime income is assured only if the insurance company backing your payment plan is sound, so choose your insurance company wisely.

Because of this unique lifetime feature, an annuity can be a valuable addition to your retirement portfolio. More people are turning to personal annuities for help in building a bigger nest egg for retirement because of the limitations imposed on IRAs and other popular long-term savings alternatives.

In addition, although tax reform (TRA '86) eliminated most tax shelters, personal annuities remain one of the few tax-deferred funding vehicles to accumulate savings for retirement. Another advantage of a personal annuity is that, unlike an IRA, there are no contribution limits or minimum distribution requirements at age 70½.* And, while contributions to personal annuities are not tax deductible, all earnings accrue tax deferred** until withdrawn, giving an annuity good growth potential.

*Applies to the annuity itself and not the qualified plan
**The tax features of an annuity are based on current tax law.

Variable annuities now outpace mutual funds as the number one choice among street-smart investors—and it's easy to see why. Tax-deferred, commission-free, easy to purchase and redeem, carrying less risk than most other instruments, and exhibiting a superb overall performance, they are an indispensable addition to any low-risk, high-yield portfolio.

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