Annuities are investments arranged contractually between the purchaser and insurance company that provide either a lump sum or stream of income, either now or at retirement, or even to an heir after the death of the purchaser. There are downsides to the purchase of an annuity, however, so it is important that you consult with Kingwood estate lawyers to determine whether this estate planning tool is suited to your needs.
How Annuities Work
The first step in setting up your annuity is to decide for what purpose it is to be used. This will dictate the type of annuity you select, and how it will be set up. You then need to do a bit of research to make sure that you select a good company from which to purchase the annuity. If the company goes out of business, after all, you could lose your investment.
Once you set up the annuity there are two phases, the accumulation phase and the payout phase.
- Accumulation Phase: This period can last very little time or for many years, depending upon what you plan to use the funds in the annuity for. If you are investing money to use as an income stream during retirement, this phase will last until that time. If you wish for the funds to be used by heirs, then you may pay into the annuity until death.
- Payout Phase: The payout phase begins at the designated time, at which you can select an option from among the following. You can choose a fixed amount, a life only, a life with a certain period, or a joint and survivor life option.
Your annuity options at payout allow you to decide how and when funds will be paid.
- Fixed Amount Option: This gives you a monthly payment for the period of time as per your contract.
- Life Only Option: You receive payments for the remainder of your life. However, beneficiaries will not receive any money from the annuity.
- Life Options with Certain Period: Similar to the life only option, this in addition allows your beneficiaries to enjoy a payout after you die. This payout is limited in time—for instance, 20 years—and begins when you start to receive payouts, so any time during which you receive money reduces the time your beneficiaries will.
- Joint and Survivor Life Option: Payments go to you or to a survivor, such as a spouse or child, as long as whichever named person is alive.
Deciding Whether to Get an Annuity
It is important to note that annuities are not for everybody. For one thing, there is a considerable up-front cost in setting one up. Also, you stand to lose your investment if the company folds. When deciding upon whether an annuity is right for you it is important to consider your age, income, net worth, ability to tolerate risk, tax status, and financial needs and objectives.