WHAT IS ANNUITY?
An annuity is basically a contract between you and an insurance company designed to provide an income guaranteed for the rest of your life. You make a payment (or payments) to an insurance company, and, in return, they promise to grow that money and send you payments during retirement.
WHY IT'S IMPORTANT?
It might be hard to think about it now, but chances are you’ll need some help taking care of yourself later in life. And this is not covered by regular health insurance. This includes assistance with routine daily activities, like bathing, dressing, or getting in and out of bed.
Many people are unable to rely on children or family members for support and help cover out-of-pocket expenses. Otherwise, long-term care expenses would quickly deplete the savings of an individual and/or their family.
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Buying an annuity is one of the best ways to pay long-term care costs without destroying retirement savings.
Most policies will reimburse you for the care given in various places, such as nursing home care, home health care, and personal or adult day care for individuals age 65 or older or with a chronic or disabling condition as Alzheimer’s disease that needs constant supervision.
Types of Annuities
Fixed Annuity
A fixed annuity is an insurance contract that guarantees the insurer will pay the purchaser a fixed interest rate on their contributions to the annuity for a specific period of time. Fixed annuities are lower risk than variable annuities, which determine interest rates depending on the underlying investments' performance.
Benefits of Fixed Annuity:
- Simple: Unlike variable and indexed annuities, fixed annuities have no complicated formulas for determining the amount of money you will receive in income payments. The rates and any changes are spelled out in the annuity contract.
- Predictable: Since everything is agreed on in the contract, you know what to expect. You don’t have to worry about whether an investment portfolio or the stock market is performing well. The interest rate is spelled out and guaranteed in the contract.
- Lowest risk: Since the interest is not dependent on investments or stocks' performance, you don’t have to worry about losing money when stocks and other investments underperform. This is especially important for retirees, who can’t afford to lose the money they need to pay living expenses.
Indexed Annuity
An indexed annuity, also known as a fixed-index annuity, is a type of annuity whose income payments are tied to a stock index, such as the S&P 500. Indexed annuities perform well when the financial markets perform well. People often refer to indexed annuities as hybrids of fixed and variable annuities.
Benefits of Indexed Annuity:
- As with all annuity types, indexed annuities are tax-deferred products.
- When stocks in your index, such as the S&P 500, increase in value, the value of your contract increases.
- The added increase in yields may serve as a hedge against inflation.
- If the stock market underperforms, you don’t lose money.
- Index gains are locked in.
- May provide better rates than certificates of deposit.
Variable Annuity
A variable annuity is a type of annuity whose value is tied to an investment portfolio's performance. Payments from variable annuities can increase if the portfolio performs well and decrease if it loses money. Although variable annuities carry the potential of higher returns than fixed annuities, they don’t offer a guaranteed payout.
Benefits of Variable Annuity:
- Possible Inflation hedge – If your investment portfolio performs well, you have the potential to see an increase in your payments, enabling you to better keep up with inflation.
- Tax deferral – You don’t pay taxes on earnings until you take the money out of the annuity.
- Initial investment protection – Usually, the annuity company will guarantee you will have access to your invested money, even if you make no interest if your portfolio does poorly.
- Death benefit – If you die before you start receiving payments, your beneficiary will receive a payout from the annuity company.
- Payments for life – You have the option of receiving payments for the rest of your life, even if your portfolio performs poorly and you exhaust your principal investment. You may have to pay extra for this option.