Buying Annuities and How to Use Them

Annuities are the opposite of life insurance. You are betting that you will live longer, while the insurance company is betting you die. Life insurance creates an estate for your heirs, while an annuity, liquidates the estate in payments or lump sum to the designated person. For example, someone dies and leaves you $50,000. You could buy an annuity from an insurance company and have a specified amount paid to you every month until you die. Buying such an annuity would receive the agreed interest rate of the terms. If you die before the term of the annuity, the insurance company keeps whatever portion is legally theirs, the balance would go to designated beneficiaries.

Some types of annuities are:

  • Single Premium, where you buy one in a lump sum and starting receiving payments the next month. The payments would be based on your sex, life expectancy etc. Or, you could have the company defer payments until a specific age and while the company has your money, it would be growing at around 4% a year. It is tax-deferred during the pay-in part. Payments are based on your age, sex, life expectancy.
  • More common are Deferred Annuities, which are usually bought by those under 40 yrs. If a person 30 yrs. old bought one for $20,000 and made monthly payments until age 60. Assume that in those 30 years, the annuity gained $80,000 due to tax-deferred interest. He would have a total of $100,000. Taking it out as a lump sum would incur taxes on the interest, however, the owner could elect to have specified amounts determined by the company to them until death.
  • Fixed Annuities are best because the insurance company bears the risk. The investment grows at a fixed minimum percentage rate. The rate can go up or down but never below the fixed minimum. During pay-out, the owner receives a non-variable amount until he dies. These are bought for retirement planning or to prepare for a child's future education expenses.
  • Variable Annuities are the opposite of Fixed because they are variable. The owner has all the risk. They are bought to hedge inflation.

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