When planning your estate in order to protect yourself and your loved ones, there are good reasons to include an annuity. Annuities allow you to guarantee a source of income for yourself, but they can also be used in order to pass funds on to beneficiaries.
1. Guaranteed Income
This is perhaps the number one reason that people purchase an annuity in the first place, it acts as insurance to protect you from outliving your assets. It is not uncommon, and it is becoming more common, for people to outlive their retirement funds. This is the result of longer lifespans. It might sound funny to purchase insurance from something that is really a blessing, living a longer life, but it makes good financial sense. When you purchase an annuity, you are guaranteed to receive funds until the day that you die, so that your family will not have to start spending their own money in order to support you. On top of this, you can purchase a joint annuity that will protect your spouse if you die. You can also purchase annuities that will continue to pay your beneficiaries if you die until your assets run out, or for a specific number of years.
Annuities are not subject to the fluctuations of the economy, at least to a certain degree. Fixed annuities do not change, which is great. Indexed annuities and variable annuities can change their interest rates somewhat as a result of changes in the economy or if they are linked to other investments, but the principle is safe. There is no chance that the funds will be lost as a result of a downswing in the economy. In the case of an annuity with a fixed income rate, in fact, the annuity will continue to gain value regardless of the fact that the economy has taken a turn for the worse.
3. Tax Deferral
Unlike a great deal of other investment choices available, the interest that you earn from an annuity is not taxed while the annuity is going through its growth period. This means that the assets grow much faster than they do with other investments. This also means that a straightforward comparison of interest rates between an annuity and a certificate of deposit or other investment is not necessarily accurate. Taxes have to be taken into account as well. Growth is much faster with an annuity.
When you set up an annuity, you set up a contract between you and the insurance company. When you do this, you also eliminate the need to declare anything in your will. You can name beneficiaries in the contract, so that this information does not need to be revealed in public when your will is read. In addition to this, an annuity allows probate to be avoided. This means that there are no delays before the beneficiary starts receiving the funds, and there are no additional taxes that need to be paid as a result.
While an annuity might not be as liquid an investment as stock in a company, there are some misconceptions about just how liquid the investment is. Many insurance companies will allow you to withdraw as much as 10 percent of your funds without facing any penalties, which can’t be done with CDs or treasury bonds.
Annuities are potentially a great financial instrument to guarantee you never run out of money. You’ll have to pay a lump sum up front, but the guaranteed returns is worth it for many people.
Readers, do any of you have annuities? Why would you want to invest in an annuity if you could just invest in a CD and stay liquid? Why don’t more younger people invest in annuities?