Annuities and debt can often be hard concepts to understand and address, but paying off your debt doesn’t have to be a struggle. Understanding the definition and purpose of an annuity and ways to reduce debt are the first steps to becoming financially smarter.
What is an Annuity?
An annuity is a financial product sold by insurance companies that allows you to put aside money, have it increase each year without paying taxes, and then trigger a stream of future payments on a timeline that you may control. Those payments are taxed as ordinary income, but unlike IRAs, there is no income limitation on how much you can place in an annuity.
Who Makes Money on Annuities?
Insurers make money on annuity fees, as well as the management services they charge you for. As they invest your annuity payments, they get to keep anything above the payments that they have promised you. In addition, they get to keep any remaining funds in your annuity contract once you’ve passed away and after they’ve settled remaining monetary obligations to your heirs.
Are There Different Kinds of Annuities?
Annuities come in a variety of forms, the most popular being fixed and variable. A fixed annuity provides you with a series of fixed payments under conditions that are determined when you buy the annuity. In this way, fixed annuities are like defined-benefit pensions. With a variable annuity, you have a significant amount of control. Variable annuities were designed to let investors participate in the stock market and still enjoy the income benefits.
Should any Precautions Be Taken With Annuities?
As with any financial investment or method to aid in paying off your debt, the proper precautions should be taken. Financial planners will often caution that insurance company management fees and charges need to be carefully reviewed and fully understood by participants. They can be steep, so buyers should be very comfortable and plan to be in the annuity for the long run.
Can Annuities be Tailored to Specific Needs?
You can, in fact, tailor an annuity to meet certain requirements regarding timing and family needs. Annuities can actually be structured to trigger payments for a fixed number of years to you or your heirs, even after you’ve passed away.
In short, annuities are not recommended as a do it yourself kind of task. They take time and expertise to understand. But if you’re thinking about investing, you should talk to a financial professional.
