What is Annuity?

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Annuity refers to an insurance plan that can serve as a retirement strategy and pays periodic income. Annuities are common among investors looking to get a steady source of income upon retirement. Annuities involve making investments in an annuity that pays on a future time or over a several dates in future. Income received from annuity may be paid in varied periods such as monthly, annually or at times, payment may be made as a lump sum. The amount of annuity payments depends on several factors which include the duration of payment period. One can decide to get payments throughout life or over a specified period of time. The amount paid is dependent on whether a person choses a guaranteed payout of based on investments underlying the performance of the annuity. Though annuities are important tools for planning retirement, their high costs can make them lousy investments. Insurance and financial planners try to frequently encourage people approaching retirement to invest in annuities. However, any person considering annuity need to study them thoroughly prior to investing their money.

Major Benefits of Annuities

The major advantage of annuities is the fact that they allow people to invest huge amounts and defer tax payment. Unlike retirement plans such as IRA and 401(k) that defer tax, annuities do not have limits on annual contributions. This enables one to pay high premiums as they wish. This is very helpful for people whose retirement age is approaching fast and feel the need to beef up their savings. With annuities, the amount invested compounds every year and does not attract tax. This opportunity to have every dollar earning is a huge benefit compared to investments that are taxable. One can also opt to withdraw money in a lump-sum though retirees opt to periodic payouts. When spread wisely, these payouts can provide a stream of income during retirement period.

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