Types of Annuities: An Overview
An annuity is a contract between you and your insurance company in which you receive payment at set intervals or on a predetermined schedule. Annuities, primarily used for retirement purposes, provide an income stream and help address the risk of outliving income. Various types of annuities exist, for example – fixed indexed annuities (or FIAs), variable annuities, and fixed annuities. While, there may be recurring income payments available with all of these products, only fixed annuities and FIAs provide protection of your principal. Generally, this fixed term lasts for your entire life. This is why we specialize in these types of annuities. These are products instead of investments.
Fixed Indexed Annuity: What is It?
A fixed annuity maintains its value over its term and your principal is safe from stock market risk. The agreement is an arrangement between you and an insurance company whereby you make periodic payments and in return, receive regular payouts. These products are mostly used for retirement and assist individuals in making sure that they won’t outlive their money. In this way, a fixed index annuity can ensure you don’t lose your money.
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Two Major Phases of Annuities
An annuity agreement has two main phases: accumulation and distribution. The accumulation phase involves letting your money grow. The distribution phase begins when retirees access and use their funds or when lifetime income begins to be distributed. While the details of each annuity contract will differ depending on the type of contract, these two steps will always apply to FIAs.
Taxes and Annuities
Your money grows tax-deferred in the first stage of accumulation. It is when you take the money out that you pay taxes. To put it another way, you only pay ordinary income tax when you make a withdrawal. For those who wish to reduce their current tax liability, this can be extremely helpful.