Far too many investors approach their personal financial portfolio with blinders on. Rather than carefully purchasing products that are designed to move them towards their financial goals and provide real purpose to their plan, they tend to haphazardly purchase products on a whim. For newer investors, it is often helpful to have the uses for annuities explained in order for them to understand how annuities work.
In very general terms, the fixed annuity takes a larger lump-sum of cash and distributes it over a certain time period. Depending on the terms of the contract, the annuity can provide payments to the annuity’s beneficiary for an allocated time-frame or for the duration of the annuitant’s lifetime. These payments allow the lump-sum value to be broken into smaller chunks.
Some investors question the reasoning behind keeping the lump-sum value inside of the account instead of simply taking the cash in a single payment. One of the reasons is that it usually doesn’t make sense from a tax perspective to keep the money out of the account. Annuities enjoy tax-deferred growth on any funds inside the account, and are only taxed upon distribution payments. A lump-sum distribution would be taxed upon payment.
The possibility of extending payments until the conclusion of the annuitant’s life is one of the other features that annuity owners find quite appealing. This stream of income is used to ensure retirement income for the duration of the retiree’s time. There aren’t many sources retirees can rely upon to ensure they do not outlive their funds. Once this stream is established, it is insured to continue during their foreseeable need.
Another great use of annuities is to use the payments to help fund other financial or personal projects. Whether the stream of income is used to fund insurance, pay your mortgage, or fund other parts of your financial plan, a cleverly crafted annuity contract can be quite useful in your own personal retirement planning.