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Freeman's Blog


October 23, 2012

There are a number of reasons why people buy annuities. This insurance-based financial vehicle can provide many benefits that retirees might want.

Retirement planningDeferral of taxes is a big benefit, and so is the ability to put large sums of money into an annuity — more than is allowed annually in a 401(k) plan or an IRA — all at once or over a period of time. Annuities offer flexible payout options that can help retirees meet their cash-flow needs. They also offer a death benefit; generally if the contract owner or annuitant dies before the annuitization stage, the beneficiary will receive a death benefit at least equal to the net premiums paid. Annuities can help an estate avoid probate; beneficiaries receive the annuity proceeds without time delays and probate expenses. One of the most appealing benefits of an annuity is the option for a guaranteed lifetime income stream.

When you purchase an annuity contract, your annuity accumulates tax deferred until you start taking withdrawals in retirement. Distributions of earnings are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if taken prior to reaching age 59½.

Fixed annuities pay a fixed rate of growth that can start right away (with an immediate fixed annuity) or can be postponed to a future date (with a deferred fixed annuity). Although life_guide_retirementthe rate on a fixed annuity may be adjusted, it will never fall below a guaranteed minimum rate specified in the annuity contract. This guaranteed rate acts as a “floor” to protect owners from periods of low interest rates. Any guarantees are contingent on the claims-paying ability of the issuing insurance company.

Download my free “Thinking Of Retirement?” Life Guide to help you with your retirement planning.