Annuities were originally designed to transfer a lump sum of funds into a stream of income for a specific period or for life. They were created for those who need a fixed, guaranteed monthly income. An annuity is a contract between you and an insurer. You fund your annuity with either an increment over time or a lump sum of money.
In exchange for the payment, the insurer will offer you either a guaranteed income stream or lump-sum payment in the future. However, is an annuity a good fit for you? This depends on your specific situation. If you think about whether you should buy an annuity, consider the pros and cons.
Benefits of Buying An Annuity
Lifetime income: If you opt for an annuity, you don’t run the risk of running out of money. This is one of the key benefits annuities have over a pension, as you can run out of money if you constantly take out money faster than it grows.
Stable income: Usually, you will receive a fixed income every month unless you opt for an investment-linked annuity. Stable income is much easier to manage, and this can also give you a stress-free lifestyle.
Protection against inflation: There are some annuities that provide a guarantee to increase your payouts in line with inflation, which means you won’t have to be bothered about stretching your money further as you grow older.
Your loved ones could receive fixed income upon your death: Some insurance companies provide a Value Protected Annuity. So, if you die before getting all your money, the insurance company will make the remaining payments to your loved ones. For instance, if you pay $200,000 for your annuity but only received $80,000 while you were alive, the insurance company will set up a $120,000 annuity for your loved one. Keep in mind that this guarantee will increase the cost of getting the annuity or reduce the amount the annuity will pay out.
Downsides of Buying An Annuity
You could be locked in for life: Once you get a lifetime annuity, there is no way of backing out of the plan. Unlike a pension, you will not be able to exchange this annuity for another or cash out for a lump sum. In the case you purchase a fixed-term annuity, you also won’t be able to get out for an agreed period.
Your fund is all tied up: Should you ever need a quick fund for an emergency, you won’t be able to withdraw money from your annuity. With a pension, you can withdraw your money should you need to.
You won’t profit from any future rate increases: The rates of annuities change all the time. You won’t get more from your lifetime annuity if the rates increase. But with a fixed-term annuity, you can still purchase a new annuity at a higher rate at the end of the current term.
Give Us a Call Today
Annuities can provide you with amazing value. However, the ease of providing guaranteed monthly income is engulfed by the intricacy, direct costs, and opportunity costs. So, it is vital to understand what you are getting with an annuity. For more information about annuities, contact Secure Insurance Group today.