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Two Basic Categories
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
are looking for an investment that earns TAX DEFERRED interest
for several years
want to contribute beyond the the maximum amount of your 401K
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
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.
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
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
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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