Monday, April 5, 2010

What is an annuity anyway?

Its essentially a reverse life insurance policy. You can either put in a lump some of money and immediately receive payments over time or you can defer some of the payments later. OR you can set up the payments as often as you want, usually its a $50/month minimum. If you choose to make flexible payments into the annuity, the growth is tax deferred when purchased inside an IRA or similar vehicle. Generally speaking, a simple fixed annuity will earn 2-3 percent interest and will have surrender charges if you take out money early. These are long term instruments. Now, there are several different version of an annuity. There are fixed, which earn a fixed amount, a fixed indexed, which earns money based on an index (usually the S&P500 or you can choose a more riskier index, but that is based on the client), and will NOT lose value when the index loses value, and a variable annuity, which has a separate account where you can choose various mutual funds or indexes as your vehicle to gain or lose value in the account. You can lose value in a variable. Which is the best? It depends on the situation and client risk tolerance. Once again, there is no 'best investment'.

Parents can take advantage of purchasing an annuity for their children. For as little as $50 per month, you can put away money for college, weddings or for their kids' retirement. When they get older, they can take over the payments! If you come into a good amount of money, purchase a fixed indexed annuity with a guaranteed income rider and 20 or so years later receive payments that can help pay for your mortgage or car payments.

Michael and Dana from Islander Insurance Advisors can help you further.

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