With so many different types of annuity plans to select from, figuring out the features and options available in the market can quickly become puzzling. That’s why we have busted the most common misnomers about annuities and answered the realities behind them.
- All annuities are the same
Like all stocks and bonds in the market, there is an array of annuities at your disposal. These options tend to fall into two basic types: an immediate annuity and a deferred annuity. When it comes to immediate annuities, you can make a lump-sum deposit and instantly start drawing income. With a deferred annuity, you give an insurance company money and the company agrees to return your money, with the pre-determined interest rate, at a later point in time. This payout period generally begins much later, such as 10 or 15 years in the future.
- Annuities have a low rate of return
Some annuities have a set interest rate, which makes it simple to compute the earnings. A fixed annuity has a fixed term or maturity and a fixed rate, so you know how much you will receive when that tenure is over. If you choose a variable annuity plan, its performance is based on the stock and bond markets in which the annuity is invested. This means it could have a good or bad performance, based on market performance. On the other hand, a fixed index annuity is a hybrid of a fixed and variable annuity plan.
- I won’t be able to access my money if I need it
Many annuities are set up for a certain time frame, often between three years and a decade. During that time, if you want to withdraw a substantial amount of the funds, you will likely get a surrender charge, which is a fee needed for withdrawing funds early or cancelling the contract. To get access to a small percentage of allocated funds, nevertheless, you might not be charged any fees. Also, some annuities provide a liquidity option in certain circumstances, such as a terminal illness or nursing home.
- A deferred annuity isn’t worth the wait
If you have a deferred annuity plan, it’s true that you won’t instantly start receiving income. You will, however, be able to include future expected payments into your retirement plan. A deferred annuity may be a perfect investment to those planning for retirement. This is also suitable for those already retired because it can provide a lifetime income flow. If you are 55 years old and set up a deferred annuity plan to start using when you retire at age 65, you have the benefit of knowing how much you will receive when retirement begins.
- An annuity will cover all my retirement needs.
While an annuity can offer an income stream, you will need additional accounts with funds that are easily accessible. Keep an emergency fund ready for unanticipated costs. Also consider other ongoing sources of income, such as FDs and distributions from retirement accounts, to create a retirement budget.
You can also use annuity calculator in order to know your premium easily.