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Why Do People Buy Annuities?
There are a number of reasons why people buy annuities. This
insurance-based financial vehicle can provide many benefits that retirement
investors might want.
Deferral of taxes is a big benefit, and so is the ability to
put large sums of money into an annuity — more than is allowed annually in a
401(k) plan or an IRA — all at once or over a period of time. Annuities
offer flexible payout options that can help retirees meet their cash-flow
needs. They also offer a death benefit; if the contract owner or annuitant
dies before the annuitization stage, the beneficiary will receive a death
benefit at least equal to the net premiums paid. Annuities can help an
estate avoid probate; beneficiaries receive the annuity proceeds without
time delays and probate expenses. One of the most appealing benefits of an
annuity is the option for a guaranteed lifetime income stream.
When you purchase an annuity contract, your annuity
accumulates tax deferred until you start taking withdrawals in retirement.
Distributions of earnings are taxed as ordinary income and may be subject to
an additional 10% federal income tax penalty if taken prior to reaching age
59˝.
Fixed annuities pay a fixed rate of return that can start
right away (with an immediate fixed annuity) or can be postponed to a future
date (with a deferred fixed annuity). Although the rate on a fixed annuity
may be adjusted, it will never fall below a guaranteed minimum rate
specified in the annuity contract. This guaranteed rate acts as a “floor” to
protect owners from periods of low interest rates. Any guarantees are
contingent on the claims-paying ability of the issuing insurance company.
Variable annuities offer fluctuating returns. The owner of a
variable annuity allocates premiums among his or her choice of investment
subaccounts, which can range from low risk to very high risk. The return on
a variable annuity is based on the performance of the subaccounts that are
selected. Variable annuity subaccounts fluctuate with changes in market
conditions. When a variable annuity is surrendered, the principal may be
worth more or less than the original amount invested.
Variable annuities are long-term investment vehicles
designed for retirement purposes. They are sold only by prospectus. Please
consider the investment objectives, risks, charges, and expenses carefully
before investing. The prospectus, which contains this and other information
about the investment company, can be obtained from your financial
professional. Be sure to read the prospectus carefully before deciding
whether to invest.
Of course, there are contract limitations, fees, and charges
associated with annuities, which can include mortality and expense risk
charges, sales and surrender charges, administrative fees, and charges for
optional benefits. Surrender charges may apply during the contract’s early
years in the event that the contract owner surrenders the annuity. Variable
annuities are not guaranteed by the FDIC or any other government agency; nor
are they guaranteed or endorsed by any bank or savings association.
© 2007 Emerald Publications
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