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What You Should Know About Annuities
Key Points for Investors to Consider
Tax-deferred annuity investments, which have had their share of detractors as well as proponents, have wholly remained under a blanket of mystery about how they function.
An annuity is a contract between you and an insurance company or other financial institution that provides regular payments on scheduled dates continuing for a certain period of years or remainder of your life. You can pay the entire amount up-front or make a series of payments to the issuer, and no tax is due until payments are received. There are numerous variations on this basic theme, yet most taxdeferred annuities may be divided into two categories: fixed and variable.
A fixed annuity is a type of annuity that pays a fixed amount at regular intervals for a set amount of time. It is tied to the performance of government-backed securities, and the payments are guaranteed by the issuer.
As the name implies, a variable annuity invests in a wide variety of investment products. The amount of your payments depends on the performance of the investments. It generally offers the opportunity for a greater return than a fixed annuity, but at a higher risk.
Although many conservative investors may feel more comfortable with fixed annuities, sales of variable annuities have grown dramatically in recent years. As with every investment, it is important to know all the implications of annuities. You may find that the terms differ from one annuity to another. You may also want to consider any fees, commissions and surrender charges you may have to pay, and know that withdrawals prior to age 59½ may be subject to a 10% tax penalty.
The Securities and Exchange Commission requires that financial institutions issuing the annuities spell out all the expenses in a standardized table near the front of the prospectus, enabling you to uncover any unexpected fees.
Please remember, although you should only consider issuers of annuities with a proven track record, be aware that past investment performance is no guarantee of future results.
Article courtesy of Rothstein Kass & Company, P.C.
August 21, 2006
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