Annuity Life Insurance

Annuity life insurance may sound like a complicated type of insurance, but it`s not as difficult to comprehend as some people believe. An annuity life insurance policy provides protection against living longer than your financial assets last. The specific features may vary somewhat, but the basic premise of an annuity is that you pay a set amount to an insurance company, and in return, they pay you a set monthly amount. Most often annuity life insurance is deferred, meaning that a number of years pass between the purchase of the annuity and the point where you begin receiving payments. In contrast, an immediate annuity starts paying you back immediately after its purchase.

Deferred annuity life insurance has a number of advantages, but the primary advantage is that the money in the account earns tax-deferred interest. While the period between the purchase of the annuity contract and the start of the distributions can vary, seven to ten years is typical. During this time, which is known as the accumulation period, the policyholder may have limited access to the money within the annuity. Many insurers will allow the policyholder to withdraw a small portion of the annuity account each year, but amounts which are withdrawn that exceed the designated amount are subject to penalties.

Once the accumulation period has ended and the annuity life insurance company begins making regular payments back to the policyholder, there are two options. Some annuity products provide a monthly payment for a set number of years; other annuities return a monthly payment for as long as the policyholder remains alive. The latter option usually results in a smaller monthly payment amount over a greater number of months.

Other options in annuity life insurance are fixed annuities versus variable annuities. With a fixed annuity, the rate of return is predetermined and is guaranteed by the insurance company. Fixed annuities are the simpler of the two options, since there are fewer choices for the policyholder. The guaranteed interest rate associated with fixed annuities is fairly low but is generally higher than market rates for certificates of deposit. Fixed annuity life insurance appeals to conservative investors who want a guaranteed rate of return along with their monthly payments.

In contrast, variable annuities are riskier but offer more choices for the annuity policyholder. While the rate of interest with a variable annuity is not guaranteed, the policyholder has a choice of investments for their money, including stock, bond, and money market funds. While variable annuities carry the risk that the interest rate may be low, they also have a good chance of earning a significantly higher rate than that of fixed annuities. A variable annuity product makes sense for the investor who is willing to take on more risk in return for greater potential rewards.

It is important to note that annuities, and variable annuities in particular, tend to have high fees and have therefore attracted a number of less-than-reputable sellers as a result. Before purchasing any type of annuity life insurance, it is a wise decision to talk with a trustworthy financial adviser to fully address the advantages and potential downsides of annuity products.