The yield is usually slightly less than a bank CD

The yield is usually slightly less than a bank CD

The finite term annuity is sometimes called a certificate of annuity because of its resemblance to a certificate of deposit (CD). An individual may purchase a finite term annuity with a variety of maturity dates and may choose when to pay taxes. The minimum investment is usually $5,000 or $10,000. When the maturity date arrives, the individual may withdraw the money and pay taxes on the gain. If the individual does not need the money and does not want to pay the taxes at that point in time, he or she can roll the money over into a new finite term annuity.

This annuity investment is an advantage for someone who is over 59 1/2. It is not ideal for someone younger than that, due to the 10 percent early-withdrawal penalty, along with the tax on the gain. There is also a question of safety.

Fixed-rate annuities guarantee a particular interest rate for a specified period of time; for example, ten years. After that period of time, only a minimum yield is guaranteed.

Annuities are often called life insurance in reverse. While life insurance creates an estate immediately upon the insureds death, an annuity protects against living too long. While many people agree that a long life is a blessing, they also acknowledge that they do not wish to outlast the savings they have accumulated upon retirement. This concern underlies one of the basic attractions of annuities. By assuring continued payments for an unlimited number of years, annuities guarantee that the insured will not deplete his or her source of income.

Its not quite as safe as a bank CD, although choosing an A+ or A rated insurance company can bridge the safety gap

The payments one makes for an annuity are referred to as premiums. Premiums, like money placed in a deposit account, earn interest, and these amounts increase in value while the insurance company invests them. The annuity contract also specifies the interest rate that the insurance company will pay on the accumulated fund. A specific interest rate may be guaranteed for one or two years and sometimes as long as five or ten years. After the guaranteed-rate period expires, the contract may call for the rate to be reviewed at specified intervals, such as quarterly or annually. At that time, the insurance company adjusts the rate in accordance with changes in the general interest rates.

One key appeal of annuities is that they offer the prospect of a guaranteed annual income after retirement, no matter how long one lives

Many insurance companies use the rate paid on Treasury bills as an index for setting the rate paid on annuities. Sometimes indexes such as consumer prices or cost-of-living calculations are used. Most insurance companies also guarantee that the interest rate paid on annuities will never be lower than a particular rate specified in the contract.

When an insurance company receives premiums on a fixed annuity, it invests them along with other funds it holds. However, not all dollars a contract owner pays are invested, since some are used for sales commissions and fees. These charges may vary between companies and contracts. Some companies charge only surrender fees. However, should the insured die before the cash value stated in the contract equals the amount of premiums paid in, most contracts provide for a payment to the beneficiary of at least the amounts paid in, regardless of sales charges.

An immediate annuity provides for payments to commence shortly after the purchase date according to the preference of monthly, quarterly, semiannual or annually under the annuity contract.

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