Insure This: How Does an Annuity Work?

Looking to get cash now for your retirement and wondering what is an annuity and how does it work? Well, if you’re anything like millions of aging Americans, retirement is on your mind.

Funding your retirement is somewhat of a puzzle.  Fitting all the right pieces together will make for a beautiful picture.

So what will the pieces of your puzzle look like? You may have a retirement plan with your employer, or inheritance as part of your plan. You may even have life insurance or long-term care. 

To learn the answer to the question, “How does an annuity work?” then keep reading for information you won’t want to miss. 

How Does An Annuity Work?

When people think of retirement planning and generating income in retirement, an annuity is not always the first thing that comes to mind. Many people find an annuity ambiguous. For good reason, because an annuity is a complex product designed for a specific purpose.

Annuities today find their roots in the annua, which was sold in ancient Rome. The annua was a financial instrument that provided money annually to those who purchased them.

Today annuities are offered as a piece in the retirement puzzle that is specific to your needs and situation.

Just how can an annuity meet retirement needs? Let’s look at the Annuity piece of your retirement puzzle and how it can benefit you.

What Is An Annuity?

The short and simple answer is that an annuity is basically an insurance contract. It is a binding contract between you and an insurer.  Which can be used as supplemental or primary income in retirement.

Annuity terms vary by annuity type, annuity provider, clientage, the amount invested, and other factors.

Do You Need An Annuity?

The most basic starting point is asking yourself, do I need income in retirement? If the answer is yes, an Annuity is something you should be sure to discuss with your Financial Professional. Annuities are insurance contracts that create income streams for you.

An Annuity can provide lump-sum payments or steady income streams and can be adjusted to meet your specific needs.

If you require income in retirement, there is a strong chance that adding an annuity product to your financial plan will be a good choice for you.

Which annuity you choose depends on what your specific needs are. This is why working with a professional to chose an Annuity is always the smartest option.

Types Of Annuities

While there are many different variations in annuity contracts, there are three main categories all Annuities fall into. Annuities are either Fixed, Variable or Indexed.

There are also immediate pay annuities and deferred income annuities. Immediate payment annuities help you get cash now, while deferred income annuities will have a waiting period.

Which type of Annuity you chose is entirely up to you and can be determined by what you decide the purpose of your annuity will be in your retirement puzzle.

This is why it is incredibly important to partner with a professional when exploring how an annuity will serve you in retirement.

How An Annuity Helps In Retirement

An annuity works as an income stream in retirement. It allows you to regularly receive money. That income is then used however you need it to meet your Financial Goals in retirement.

The annuity market is complex and the product offering is vast. Choosing the annuity that is right for you is a decision that needs to be made carefully.

Remember that fixed annuities generally come with fixed or steady payments, while variable annuities may have variations in their payments. Such as if the investment fund does well your payments may be higher and if the investment fund does poorly your payments may be less.

Annuities also have terms and conditions.  For example, most annuities come with surrender periods. This simply means there will be a waiting period before you can withdraw funds from your annuity.

Annuities can help defer taxes. You may be able to defer taxes on the income that you have invested into the annuity until you take income.

When to Get An Annuity

Knowing the basics of annuities is just the beginning. Now you may have a few questions, such as:

  • Am I the right age for an annuity?
  • Is this the right time to buy an annuity?
  • Will I be able to use my annuity when I need it?

All of these questions are great questions that a professional can answer and help you work through.

Annuities are insurance products designed to help people obtain the money they need when they need it. Within the parameters of the annuity contract.

Want to Explore Which Annuity Is Right For You

People all over the world use annuities. They use them for a myriad of reasons in retirement. Annuities can be boiled down to your personal financial decision and what you feel works best for you.

Everyone knows retirement planning is complex. It can be incredibly overwhelming. The best part is you do not have to go at it alone. Industry experts are available to help.

Annuities do not have to be confusing or mysterious. Annuities are meant to be a helpful product that compliments your current retirement plan.

Deciding to Get an Annuity

Now that you have an answer to the question, “How does an annuity work?” you can speak with a financial planner about whether or not an annuity is right for you. Remember that annuities help you prepare for retirement, and are a useful part of your retirement portfolio.

If you enjoyed reading about annuities, then be sure to check out the rest of our website. We’ve got plenty of great information for you to read. 

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