When it comes to retirement, many of us remain out of the loop. We know that retirement means sitting back, relaxing, and receiving a check each month. However, the amount you receive and whether or not you need to turn to work is in a constant state of flux. Or, at least, it could be. You have an opportunity to invest in your future. One such investment solution comes in the form of annuities. But what are annuities?
What Is an Annuity?
An annuity is a type of contract formed between you and your insurance company to accomplish a specific goal. Some examples of common goals include principal protection, lifetime income, legacy planning, or long-term care costs.
Typically, annuities are marked as investments, though they are not. Instead, annuities are contracts. You are locked in with the insurance company. Breaking the contract can have financial consequences.
How Do Annuities Work?
An annuity works by transferring any risk from you, the annuitant, to the insurance company directly. You pay the annuity premiums, then the insurance company takes on the risk. Like most types of insurance available, your premium is either a lump sum or a series of payments.
Overall, annuity lifetime income payments are based on life expectancy. As such, you’ll receive smaller payments but for a longer time. The younger you are, the longer your life expectancy.
Annuities Have Early Withdrawal Penalties
An annuity is designed for retirement. Therefore, early withdrawal, like with other types of insurance programs, could mean a steep withdrawal penalty. These penalties are known as ‘surrender charges’ and vary depending on the company. Most surrender charges vary from between 2 and 10 years. The overall charges you pay will decline over time, though.