I posted an annuity primer a few days ago, but that was just to get our feet wet. Now I want ot work on reasons that individuals may buy an annuity. This post will still have to be fairly general, as you need to work out specifics for your own situation. Consider risk, cash value, taxes, and leaving money after death when you think about annuities.
I think that two sorts of people tend to look at annuities. The most common type are people at or nearing retirement who may have a chunk of savings they want to invest wisely. Some annuities can provide a guaranteed life income which can provide security for people in their retirement years. Another growing group of annuity investors are younger people, planning for their retirement in the distant future.
For retirees considering an immediate annuity, you have tax favored withdrawals. After age 59 1/2 you can withdraw money without a tax penalty. If you choose a life settlement, you can stretch out the ‘gains’ portion of your investment over a longer period, which should decrease your tax bill.
For younger investors, you have tax deferred accumulation. If you don’t have to pay a tax bill on gains every year, you will increase the cash value of your investment quicker. Besides, many indexed annuities have a track record of paying far above CD interest rates. Add in a guaranteed minimum, and you have a safe investment with the potential for high rewards!
One other consideration is the beneficiaries of an annuity can inherit without probate. In that way, annuities combine an investment contract with an insurance contract.
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