At their core, annuities are a contract between you and an insurance company. In exchange for your contributions – either one lump sum, or periodic premium payments – the insurance company guarantees you a certain amount of income over a set period of time.
For those who choose the lifetime income option, the worry about running out of money in retirement can be alleviated. And with many annuities, the lifetime income option can also be extended to a second individual, such as a spouse or partner.
But income is actually just one of many benefits that you could attain from an annuity. For instance, these financial vehicles can also provide you with the ability to grow your money tax-deferred, as well as a litany of possible other uses for the money you have in your account.
First, there is the beauty of tax-deferred growth. This means that as your money grows inside the annuity’s account, you won’t be taxed on that gain – at least until the time you withdraw it. This can allow the funds to compound exponentially over time.
For this reason, annuities can offer a great avenue for those who have “maxed out” their annual IRA and/or employer-sponsored retirement plan contributions, but who still want to add more into a tax-advantaged vehicle.
Death Benefit Protection
Most annuities also offer some type of death benefit protection. Depending on the annuity, if the annuitant (i.e., the income recipient) has not yet received back all of his or her contributions at the time of their death, then the remainder (and possibly also some additional interest earnings) will be paid out to a named beneficiary.
There are some annuities that offer the option of an enhanced death benefit. This type of benefit will offer annual or monthly “step-ups,” which basically increase the death benefit amount over time.
It is important to note here, though, that unlike a life insurance policy death benefit that passes income tax-free to beneficiaries, there is typically a tax liability on death benefits that are paid out from annuities.
Money for Terminal or Chronic Illness
While nobody wants to think about being diagnosed with a terminal or chronic illness, the reality is that the unexpected can occur – and if it does, it not only takes a physical toll but a financial toll as well.
If your annuity has a terminal or chronic illness waiver, you will be able to access funds from the annuity – and typically, these funds may be used in any way that you see fit. In some cases, there is an additional premium charge to add a terminal or chronic illness waiver, and in other cases, this benefit is offered at no cost.
Note here, though, that if you access these funds before you turn age 59 ½, you could incur a 10% “early withdrawal” penalty from Uncle Sam. This can equate to a lower net amount of funds that you actually receive.
Annuities and Long-Term Care Needs
Today, the cost of long-term care is one of the biggest threats to your savings. Statistically, once someone turns age 65, there is a high likelihood that at least some type of long-term care will be needed in their lifetime…and this care can be expensive. In fact, in some areas of the country, just one month in a skilled nursing facility can cost upwards of $10,000.
If you end up needing long-term care, your annuity may allow you to access some – or even all – of the money in your account without penalty. And in some cases, a nursing home or long-term care rider may even provide double the amount of your monthly income in order to help pay for these expenses.
Which Annuity Benefits are Right for You?
Just like shopping for a car, there are many, many options that can get you from Point A to Point B. But not all vehicles are right for all drivers. The same holds true with annuities. Today, there are a myriad of options available to you so it can be extremely beneficial if you discuss your objectives with an annuity specialist before you purchase an annuity. That way, you can be better matched with an annuity that most closely fits what you need it to do for you.
At Annuity Gator, we make the annuity buying process easy. That’s because we start by educating consumers on how annuities work, and in turn, whether or not an annuity is even the best choice for their particular needs.
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