How Does an Annuity Work?
Understanding the Basics of Annuities
We Can Help You Answer:
What is an Annuity?
An annuity is an insurance policy that can help provide a steady stream of income in retirement. There are several types of annuities. They can either be fixed or variable. Each annuity offers features that may help you achieve your financial goals for retirement.
How Does an Annuity Work?
To answer the question of “How does an annuity work?”, let’s look specifically at fixed index annuities. FIAs are tax-deferred, have higher interest growth potential, and have less risk than a variable annuity.
An FIA is based on the performance of an underlying index, such as the S&P 500. Therefore, they offer some of the benefits of index funds but are not directly linked to an index. This is because an FIA is an insurance policy and not an investment. So, fixed index annuities are generally protected against loss of principal, even when the market declines.
Annuities Have Two Phases
There are two stages to annuity contracts. While each type of annuity is different, these two phases apply to all annuities. The two main phases are accumulation and distribution. How does an annuity work in these 2 phases?
The accumulation phase involves letting your retirement money grow to accumulate value. Fixed index annuities will grow with a set interest rate regardless of market conditions. Additionally, they may provide greater returns when the index rises while protecting capital when the index declines. As you leave your money in place, your money grows steadily.
The second phase of an annuity contract is the distribution phase. In this phase, you begin receiving regular payments from the annuity, creating retirement income. When an annuity is annuitized, it becomes a regular retirement payment. Withdrawals can be scheduled for monthly, quarterly, or annual payments. Certain payments from an FIA can be withdrawn without penalty. The option of receiving a lifetime income is also available.
About Annuities and Taxes
Your money grows tax-free as it accumulates. You pay taxes once withdrawals are made. Taxes are owed only at this time. This is a very useful tool if you want to reduce your current tax liability.
Contact us to learn more about “How does an annuity work?”.
