An annuity is a contract whereby an insurance company guarantees a series of payments over a person’s lifetime or a fixed period in exchange for a lump-sum payment made at the beginning of the period. The main purpose of an annuity is to provide you with a guaranteed stream of income that he or she cannot outlive.
How Do Annuities Work?
There are two basic kinds of annuities: immediate annuities and deferred annuities. Immediate annuities begin payments right away. Deferred annuity contracts have two phases – the accumulation phase and payout phase. During the accumulation phase, the owner deposits a sum of money – either a lump sum or a series of payments.
Unlike a life insurance policy, an annuity does not require you to make payments for the entirety of the contract period. The owner of the contract can decide at any point to stop making further contributions and/or to convert the contract into a stream of payments (to annuitize).
During the payout phase, the insurance company makes payments according to the payout option elected. The most common options are payments monthly or annual payments paid over the lifetime of the annuitant or over the annuitant’s lifetime with a minimum guaranteed number of years.
Annuity contracts and the laws governing them can be very difficult for the average person to comprehend. There are various types of disputes that can arise, such as disputes among different beneficiaries, disputes over the terms of payouts, or the amount due. If you have issues, you should not attempt to deal with the company directly or try to settle them yourself with the other parties. You should contact an experienced life insurance lawyer or attorney.
What Are the Different Types of Annuities?
Fixed Annuities – You receive a specific amount of interest at regular intervals irrespective of market conditions.
Variable Annuities – Your money is invested in a set of separate accounts operated like mutual funds and the account value fluctuates depending on market conditions.
Indexed Annuities – The payout depends on a formula based on the performance of a stock market index.
Variable annuities are generally not a good choice for risk-averse investors, as the returns can be negative depending on how the market performs.
Indexed annuities pay returns based on a formula when the market goes up but have guaranteed minimum interest rates. The results vary widely, but not as widely as those of variable annuities.
There are risk disclosure requirements that relate to all annuities. If you are misled about the risks involved, you may be able to take legal action with the help of a life insurance claims lawyer to recover your damages.
What Are the Benefits of Investing in Annuities?
- They can provide you with a regular, reliable stream of income – either for a specific period of time or until your death.
- If you die while your annuity contract is in force, your beneficiary will receive a sum of money – either as a lump-sum payment or as a series of payments.
- All income is tax-deferred until money is distributed.
- Unlike an IRA or 401(k), there is no upper limit for the amount of money you can contribute to an annuity. So, you can put away as much money as you want for your retirement.
What Are the Downsides of Investing in Annuities?
- The rate of return on fixed annuities is quite low, so the payout might not be sufficient to meet your financial needs. Variable annuities, on the other hand, are risky and cannot provide you with reliable cash accumulation.
- The commissions, fees, and charges associated with annuities can be substantial.
- The majority of the money you invest in an annuity is locked in for a period of time known as a surrender period. You have to pay a surrender charge for withdrawals over a set percentage (usually 10% per year).
Experienced Life Insurance Lawyer in California for All Your Annuity Related Issues
Attorney Benjamin Blakeman is one of a very small number of litigators representing consumers who have actually worked in the life insurance industry selling both life insurance policies and annuities. This experience has prepared him for just about any issue relating to life insurance or annuity-related litigation matters.