Life Insurance Annuities
What looks like a bond and a retirement plan but is created by insurance companies? If you guessed annuities, you probably know a little bit about this interesting insurance product, and if you didn’t, you’ve come to the right place to get the scoop on annuities.
How Annuities Work
Annuities look like life insurance policies turned upside down – or inside out, depending on your perspective. Instead of paying premiums on a monthly basis so that your beneficiaries receive a benefit upon your death, you pay an annuity premium when you buy the contract, and then you receive the benefits in monthly installments for the duration of the contract. The premium is tax-deferred, just like contributions to retirement plans are.
Each payment has a bit of interest added on, which is why annuities work in some ways like bonds do. The insurance company raises the money for the interest payment by investing the money you pay when you purchase the annuity. This process is yet another way that annuities resemble bonds.
The pricing of an annuities contract and the duration of the benefits is where the actuarial math comes in: somewhat like life insurance policies, an annuity can expire upon the death of the policyholder. In annuity terms, this is called maturation. Some annuities, however, have a preset time period, and the benefits come on a monthly basis until a predetermined end date.
Confused? Well, annuities are not the kind of insurance product that suits all types of financial situations. The ideal customer for an annuity is someone who is nearing retirement age and is concerned about whether there’s enough money saved to last through that entire period of life.
Annuities as a Vehicle for Retirement Planning
Annuities are not substitutes for estate planning, as they don’t make convenient inheritances. Oftentimes, insurers limit annuity benefits to the individual who purchased the contract. And even when the contracts stipulate that an annuity can pass to heirs or beneficiaries, these individuals most often encounter a bureaucratic set of procedures when arranging for the transfer of the benefits. Finally, annuity benefits are taxed as income, so they’re not ideal for anyone looking to provide their beneficiaries with inheritance tax breaks. Most people presume that all types of life insurance inheritances are tax free, and that ought to be true when an estate is well planned. As such, individuals who sell annuities should tell you outright that these products are not intended for inheritances.
Where Annuities Come From
All types of financial institutions sell annuities, but these products originate in the underwriting departments of insurance companies. That includes subsidiaries of banks, investment houses and lenders licensed as independent insurers. These entities are regulated by state governments, which can be an important piece of information in the unlikely event that you encounter a problem with an annuity product. So, for example, if you wanted to file a formal complaint about annuities you purchased through an online trading website, for example, you would want to contact your state’s insurance department instead of the Securities and Exchanges Commission.
You’ll want to make sure that you read all the fine print before signing any annuities contract. There’s no such thing as too much caution when you are deciding whether to make this type of investment. Your retirement fund will thank you.
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