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April 27, 2016

Considerations of Investing in Annuities

Considerations of Investing in Annuities

Annuities are a popular investment product that often provides a good financial return. Annuity plans supply a set amount of money to Annuitants over a predetermined time period. This type of investment is generally purchased to provide supplemental income, but associated costs tend to make it cost-prohibitive for most people.

A major benefit of annuities is they provide opportunities to take advantage of tax-deferred savings. Annuitants can opt to obtain investment income right away or delay payment until later on.

Setting up annuity plans is a complex process that is best handled by a professional financial planner. Working with professionals can help investors minimize risks and maximize benefits.

Establishing annuity plans can be confusing, so it is best to work with a financial advisor to minimize risks and maximize results. Investors can select from either deferred or immediate payment annuities. As with any type of investment product, there are pros and cons with annuity investing. The biggest drawbacks are early withdrawal penalty charges and tax repercussions.

With deferred payment annuities, investors make contributions to their plan during the ‘saving’ phase and earnings are distributed at a later time during the ‘income’ phase.

With immediate payment annuities, investors make a lump sum contribution to buy annuities than provide installment payments for a predetermined amount of time. Investors receive a monetary distribution immediately after establishing their annuity plan. Both deferred and immediate payment plans can be established as variable or fixed.

Variable annuities are governed by the Securities and Stock Exchange Commission. Fixed annuities are exempt from SEC regulations. Variable annuities generate profits based on performance, while fixed annuities provide investors with the same payout each month. Annuity plans can be established for predetermined amount of time, such as 5 or 10 years, or for a lifetime.

Annuitants can establish beneficiaries to receive investment proceeds in the event of their death. Beneficiary designations are categorized as ‘spousal’, ‘non-spousal’, and ‘unusual owner-annuitant’ which generally refers to married couples that own the plan together. Several annuity plan payment options are available.

Some of the more common include: Single Premium Immediate Annuity: Annuitants buy insurance products with lump sum cash and transfer into fixed payments that supply income for a specific amount of time.

Single Premium Deferred Annuity: Annuitants purchase insurance products that earn interest on accrued funds.

Variable Deferred Annuity: Investment money is used to buy several insurance products. Income is generated based on performance of each product.

Flexible Deferred Fixed Annuity: Investments earn a guaranteed rate of interest and supply fixed payments to investors. Investors need to be mindful of concealed fees connected to annuity investing.

Annuities are usually bought through an insurance broker that receives commission for the sale. The average broker commission is 10-percent. Other fees associated with this investment product include: insurance riders, insurance charges, and investment management fees, which typically range between 2- and 3-percent of the invested amount.

Careful attention should be given when extracting funds early because penalties can be a staggering 10-percent or more. Hidden fees can quickly amount to 13- to 23-percent of total investment. It’s imperative to become knowledgeable about annuities investing practices and carefully assess potential risks.

Many investors think annuity investing is a smart and profitable option, while others think they are too risky. Only you can decide if annuities are the best investment product for your financial objectives.

An article by Simon Volkov

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