The U.S. Securities and Exchange Commission defines an annuity in simple terms: it is a contract between you and an insurance company, whereby you make a lump-sum payment or series of payments. By doing so, the insurance company agrees to make periodic payments to you beginning immediately or on a future date.
Annuities usually offer tax-deferred growth and may include a death benefit that pays your beneficiary a guaranteed minimum dollar amount.
There are two basic categories for annuities: fixed and variable. When you opt for a variable annuity, you decide how to invest your money, which is often in mutual funds. When you choose a fixed annuity, you don’t have to choose your investment options and you earn a minimum rate of interest while your account is growing. You are also guaranteed that the periodic payments are a fixed amount per dollar in your account.
One of the benefits that come with annuities is that they are good for people who want to receive a steady income stream in retirement. The size of that steady payment is determined by various factors, including the length of your payment period. There is also a deferred tax advantage associated with annuities.
As is the case in many investment options there are pros and cons to annuities. The main positive is the reliability of the return given to beneficiaries. However, they may also come with high fees. Before deciding whether or not an annuity is the right investment choice for you, allow Healthy Financial to go over your options with you and explain the pros and cons as they apply to your unique situation.
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