Annuities are regular payments that insurance companies provide in return for contributions, typically to a life insurance policy. For some, annuities represent a valuable estate planning tool, providing a way for retired people to ensure a regular income even if they live a long life.
"Annuities can be helpful in estate planning, but it is important to understand the differences between the types of annuities, as well as their limitations. They should typically be considered for people who have maxed out their IRA and 401(k)s but are still looking to save aggressively for retirement."
Single-premium immediate annuities are the most basic type of annuity, in which the insurance company pays a set sum of money for a given period of time. Other types of annuities include variable annuities, in which payouts are based on investment funds' performance, and indexed annuities, in which payments are tied to a stock index. Some variable annuities allow owners to purchase a rider that guarantees a minimum annual payout.
Variable and indexed annuities now represent the majority of annuities sold, at about 80 percent of all annuities. These types of annuities can be useful, but they also tend to be complex and can be risky. For example, if the value of the investments tied to the annuity decreases, the annuity's cash value can decline as well, meaning that a minimum payout rider does not truly protect against loss. Indexed annuities can be particularly troublesome, as they provide no guaranteed income.
One of the biggest advantages of annuities is that the assets accumulate tax-deferred, as in a traditional retirement account. Although annuity contributions are not tax-deductible, there is no limit to the contributions a person can make. For individuals who have already made their maximum contributions to their 401(k) and IRA, an annuity may be a strong choice.
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