Annuities are the only financial vehicle that guarantees income for life in exchange for a contribution or series of contributions. Various types of annuity plans exist. Each type of annuity would have its own set of merits and demerits. The broad types of annuities that exist are:
a) Fixed annuities- These offer minimum guaranteed interest rates and accumulate on a declared interest basis. Fixed annuities have their funds invested in bonds and securities primarily.
b) Variable annuities- These operate in a mutual fund environment. There are often charges associated with them.
c) Immediate annuities- Offer payouts on the basis on a single contribution. The payout level is based on whether the immediate annuity is fixed or variable and is also contingent on the insurer.
d) Deferred annuities- Tax exempt contributions are made over an accumulation phase. The cash value at maturity would determine the lump sum and pension for the payout phase.
Although annuities are so varied, their benefits can be stated generally. The benefits of annuities that apply regardless of the type of annuity involve include:
1) Guaranteed lifetime income- Even though some immediate annuities offer variable payments, those variable payments are guaranteed for life. Annuities help guard against the risk of outliving your life savings.
2) Unlimited contributions- there is no limit to how much you can invest in an annuity, whether it’s a single contribution or a series of payments.
3) No probate- once you assign beneficiaries to an annuity, the cash value would be easily transferred to them on the annuitant’s death.
4) Low-risk investment- even variable annuities bear lower risks because the funds are pooled and the portfolio is sufficiently diversified. Fixed annuities are protected by the types of investment instruments held on behalf of investors.
5) Protection from creditors- even if you go bankrupt, the money invested in annuities cannot be liquidated to reduce or eliminate your debts. Annuities are designed to protect your welfare at retirement and their purpose is enshrined in law. Most annuities are guaranteed by statutory or reserve funds, to safeguard the annuitant from poor performance.
Immediate annuities in particular have additional benefits:
1)Higher annuitization rates than market rates- the payout rate for some immediate annuities are as much as 10%. Fixed immediate annuities offer absolute guarantees in return for your one-time investment.
2)Tax exempt retirement income- pension payments from deferred annuities may be taxed during retirement. Immediate annuities are typically exempt from taxation, regardless of the amount of the payout.
Deferred annuities have the advantage of offering tax breaks on contributions during the accumulation phase. Variable annuities offer potentially higher rates of return that reduce inflation risk. For those who are starting planning for retirement late, variable annuities may provide the best benefit. Evidently, some benefits are better than others in certain contexts. Insurers sometimes include bonus rates and other clauses in annuity plans that can make a significant difference.
Flexible premium annuities are annuitant-friendly and do not contain sinister paid-up clauses that force you to contribute even if the annuity performs badly. Flexibility is major benefit that should be sought when acquiring deferred annuities of whatever type. In selecting an annuity, the benefits must be able to work for you; even while outweighing the demerits.