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Definitions And Buying Tips

Two Basic Categories

Annuities can be broken down into two basic categories: Immediate and Deferred. Both of which are financial contracts between you and an insurance company. Typically, an immediate annuity will provide an income stream "immediately"; while a deferred annuity is a vehicle that assists you in accumulating money and "deferring" payments for a future date. The primary difference between the two is when you begin receiving money from them.

Which Type Would Best Fit Your Needs?

DEFERRED may be the best option if you:

need to save for your retirement future

will not need to touch the principal and interest until age 59 1/2

are looking for an investment that earns TAX DEFERRED interest for several years

want to contribute beyond the the maximum amount of your 401K or IRA

This can be an excellent means of accumulating money for retirement, especially if you have several years until retirement. Your money accumulates on a tax deferred basis; which means you will not have to pay taxes on the earnings until you start withdrawing money from the account.

IMMEDIATE should be considered if you:

have a lump sum of money that you want to start drawing income from

are looking for a fast return from your investment

are retiring soon

need additional monthly income

This option offers reliable security; an income stream that will continue for the rest of your life (depending on the payout option you select). If you are nearing retirement, this may be the best place to put a large lump sum of money that you may have accumulated from previous investments.

Investment Options

Once you have chosen to purchase either an Immediate or Deferred Annuity, you will want to decide when to start receiving a return on your investment; and how you will invest the money in order to generate a return. There are two basic categories for this. They are as follows:

Fixed annuities earn a guaranteed interest rate for a specific period of time, i.e. 1, 3 or 5 years. Once that period has ended a new rate of interest is determined for the next period. With a guarantee of principal and interest, these are much like a Certificate of Deposit. Keep in mind though, that they are not backed by the Federal Deposit Insurance Company. That being said, you will want to make sure that you are doing business with a financially healthy company.

You can purchase a fixed annuity by either making a lump sum payment (single premium annuity) or by making payments on an ongoing basis (flexible payment annuity).

A Variable annuity will generally offer a range of investment / funding options. Such options might include bonds, stocks money markets, etc.. The difference with these is that the principal and interest is not guaranteed but is dependent on the performance of the selected funding options. It is possible to experience a higher investment return than the Fixed Annuity; but there is also a risk of losing prior earnings and even a portion of your principal. There are also variable annuities available that have a Fixed Account Option, guaranteeing both interest and principal.

These are usually sold on a periodic payment basis, rather than a one time lump sum.

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