3 Questions to Ask Before Buying an Annuity

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Annuities are a form of insurance that can help you prepare for retirement. If you are considering purchasing an annuity, you always want to do your research before making a purchase. For more than 25 years, our team has devoted their experience and expertise to giving our clients the knowledge to make empowered decisions for their future. We will be the resource you need to learn more about annuities.

Here are 3 questions you need to ask before making a decision.

What Kind of Annuity Do I Need?

There are several types of annuities currently available on the market. Which one you choose will dictate how your benefits are dispersed, how much they will grow, and how secure they will be. If you don’t know the difference between the annuity types, here’s some more information on each one.

Immediate Annuity

The hardest part of planning for retirement is estimating how long you are expected to live. That’s why immediate annuities are designed to provide beneficiaries with a guaranteed source of income for the rest of their lifetime. The only issue with this type of plan is that you have to trade liquidity for a guaranteed income. This means you won’t be able to access a full lump sum in the case of emergencies.

The upside to this type of annuity is that you know that regardless of what happens, you will always have an income. If having a large sum of money on hand doesn’t sound completely necessary for you to have a smooth retirement, the immediate annuity may be a good option for you.

Deferred Annuity

A deferred annuity offers beneficiaries a guaranteed income in the form of a lump sum or monthly payments on a future date. You basically provide the insurer with a lump sum payment, or monthly premiums, then they invest them into a growth strategy. You have some choice in what type of strategy they implement, as the money can be invested in fixed, variable, or index funds. Over time, the principal amount can grow, allowing you to receive higher payments in the future. This plan is best for people who wish to contribute to their retirement income on a tax-deferred basis. That means that beneficiaries won’t have to pay taxes until the money is taken out of the account. 

Fixed Annuity

These are the most simple annuities available. With this type of annuity, the insurance company provides you with a fixed interest rate on the investment when you agree to a guarantee period. Once your contract is over, you can annuitize the contract, renew it, or transfer the money into another annuity contract or retirement account. The plan won’t be impacted by market volatility, so you can trust that what you see is what you get. The amount that you put in will directly dictate how large your future monthly payments are.

Variable Annuity

This is another tax-deferred annuity contract that allows you to invest money into sub-accounts. With time, your investments may even exceed the rate of inflation. The plans work similarly to 401(k) plans, as those also allow you to invest your money in sub-accounts. These sub-accounts are dependent on the market’s performance, though. This type of plan can be essential for people who’ve already maxed out their Roth IRA and 401(k) contributions.

How Much Do Annuities Cost?

Annuities vary in cost based on the type of plan you choose. Some plans are commission-based, meaning the contract is paid for based on the dollar amount invested in each individual contract. Others are fee-based, meaning a percentage of the annuity’s premiums are paid as a fee. The fee could be between one and three percent.

How Do Annuities Work?

Now that you know what types of annuities are on the table, it’s time to learn in more detail how they work. Each different type of annuity has different rules, so we’d like to explain it to you in person. Give Malhotra & Assoc. Insurance a call, and we can answer all of your annuity questions.

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