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by Henri kahn

A summary explanation of an annuity

An annuity may be defined as a contract whereby for a consideration, (the premium), one party (the insurance company), agrees to pay a person, (the annuitant) a stipulated amount of money for as long as the person lives. So, the person, (the annuitant), receives a periodic payment, monthly for example, throughout the person's life. That's right, you get the money no matter how long you live.

The annuity can be for one person or for a husband and wife so that they receive the income together for life or when one dies, the surviving spouse will continue receiving an income until death.

Anyone can purchase a nonqualified annuity.

A nonqualified annuity has nothing to do with the qualifications of the annuity or the insurance company.

A qualified annuity is one that is used as part of or in connection with a qualified company retirement plan; so don't think that a nonqualified annuity is a bad idea.

Unique feature of an annuity

A person can possibly outlive their individual savings, retirement plan benefits and other assets. An annuity offers protection against this possibility, because you can't outlive the income.

Who purchases annuities?

Many people think that annuities are purchased only by wealthy persons who have already accumulated a large estate and can place thousands of dollars in an annuity.

A substantial number of annuities may be purchased for as little as $50.00 per month.

Even this modest amount, over time with the benefit of tax deferral can grow into a significant sum of money.

Tax deferral, in this context, means that the interest earned is not taxed until a person starts taking the money out of the annuity.

Fixed annuity

When you purchase a fixed annuity you know what the current and guaranteed interest rates are, and barring the insolvency, (bankruptcy) of the insurance company you can be sure that the rates of interest will be credited to your annuity.

It's important for you to know that a fixed annuity “guarantees” a certain interest and any interest above the guaranteed rate can vary, but, once again you do have a minimum guaranteed interest rate.

Equity-indexed annuities

This type of annuity allows the holder of the annuity to participate in market index increases without completely giving up the guarantee of the money you put into the annuity and the guaranteed interest rate.

Therefore, the ETA allows the holder of the annuity to participate in stock market gains without assuming the risk of losing money when the market declines. This feature is very appealing especially with such low certificate of deposit interest rates.

A commonly used index is the Standard & Poor's (S&P 500).

Variable annuities

Variable annuities are subject to a greater degree of regulation, because they are considered securities.

Guaranteed interest rates for this type of annuity are generally lower than with other types annuities.

A variable annuity can be more complicated than a fixed annuity in that the annuity holders select from a number of investment choices that require, in my opinion, astute investor savvy.

Getting your money from the annuity

If you own a nonqualified fixed annuity, you can get your money anytime. However, annuities are for long term investment and include surrender charges for money withdrawn prior to completion of anywhere from 7 to 10 years beginning with the day you start your annuity. This is a clear indication to you that annuities are for your long-term financial plans.

In spite of the surrender charges, most annuities include a withdrawal feature that permits withdrawal up to a small, usually ten percent, amount of money without the application of a surrender charge. Some annuities also include a penalty-free withdrawal for funds used to nursing home charges.

Qualified annuities usually require you to wait until retirement age, starting at age 591/2 t you can get your money without incurring a penalty tax imposed by the IRS.

Uses of annuities

You can use annuities for retirement, college funding, business planning, deferred compensation plans and sale of a business.

There is more to annuities than what appears in this summary article, but it is well worth your time to investigate annuities as a vehicle to accumulate money at minimum risk.

And . . .

Pray for our troops in Iraq , because what is happening militarily over there truly confirms that “Military intelligence is a contradiction of terms”.