Annuities

One of the most common questions we are asked about is how annuities work? An annuity can be thought of as a long-term investment to increase your income stream later on in life. Unlike other investments, though, an annuity is backed by an insurance company so there are few risks. It is a contract between an investor and the insurance company offering the product, and the stipulations of the contract can be negotiated based on the investor’s needs.

The key benefits of owning an annuity are that it is a relatively safe investment, provides long-term financial security, doesn’t require the owner to pay taxes until they start receiving payments, and cannot be divvied in probate. However, there are a few downsides that you must consider as well. First, you are locked into the contract, meaning you can’t ask for your payments sooner in the event that there is an emergency and you need cash right away. Second, some critics have argued that annuities can be expensive for the return they provide. They argue there are other investments that offer a better return on your investment. You might also be bound by the IRS rules for Required Minimum Distribution (RMD).